liquidity abundance leads to the narrowing of spread between riskier and safe assets (mostly government bonds) safe assets fall in price, with their yields increasing towards the riskier ones US bond yields are high under tighter monetary conditions - liquidity is pro cyclical

Illya Gerasymchuk 2025-07-05 15:51

the higher use of lower quality collateral has pro-cyclical effects if the price of collateral falls during economic downturn - you’ll get a lot of margin calls & insolvencies. this will further put pressure on short-term funding mechanisms, which already lack HQ collateral