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Aon Retirement and Investment Blog

Liquidity Conditions and Trading Costs around Christmas and the New Year

This year has seen election results globally that have confounded pollsters’ expectations, renewed episodes of quantitative easing from some central banks whilst others have embarked on more restrictive monetary policy paths. This has led to large price movements across many asset classes and led investors to consider making significant changes to their asset allocation mixes.

At the time of writing the S&P 500 is up more than 21% from its year lows and making new all-time highs. Fixed Income markets have similarly seen significant yield moves; 10-year U.S. Treasury yields have risen 100bps from their year lows, the sharpest move since the “Taper Tantrum” of 2013.
Against this backdrop we wanted to address expected liquidity conditions as the holiday season approaches, specifically whether investors should hold off major trading initiatives until the New Year.

The charts below detail volume trends of U.S. equities and U.S. Investment Grade credit during the month of December over the last three years. These charts, as well as discussions we have had with both transition management providers and asset managers, lead us to conclude that investors should carefully consider the timing impact of any large asset movements during the last two weeks of the calendar year.
As shown below, equity market liquidity (measured by volume traded of S&P 500 futures) tends to be plentiful in the run up to Christmas and spikes on the trading day associated with equity options expiry. Liquidity then traditionally drops sharply the week of the Christmas holiday before beginning to pick up into the New Year.

Corporate Bonds
The chart below shows that liquidity has evaporated more sharply after approximately the 12th trading day of December and remains at subdued levels for the remainder of the year.

Whilst the key driver behind our recommendation to refrain from non-essential trading activity is driven by the lack of volume, it is worth noting that different countries and markets operate different holiday schedules, which can make coordinating global trades challenging. Finally, it is important to note that investors in many commingled funds are not immune to the lack of volume that prevails as asset managers typically reserve the right to widen the bid/offer spreads of funds to ensure elevated trading costs are borne by those investors changing their allocations.

Paul Whelan is a fixed income researcher and transition management specialist in Aon Hewitt’s Global Investment Manager research team in London.

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