Markets influencer Mohamed El-Erian says the potential evaporation of liquidity is a big risk to global markets and economies amid signs that capital is becoming more expensive and difficult to acquire.
"The one risk I'm really worried about is liquidity risk," El-Erian told Bloomberg Television's The Open on Friday. "We're starting to see markets locked out of funding. Issuance in June was very low. Companies either were unwilling or unable to refinance themselves."
The U.S. high-yield bond market, for example, in June saw yields and spreads jump to a two-year high in the biggest monthly loss since the onset of the pandemic in March 2020. Volatility and the rising cost of debt kept borrowers away from the market.
Junk-bond issuance dropped to $25 billion in the last quarter, the lowest second-quarter supply since at least 2006, according to data compiled by Bloomberg. June volume was $10 billion, the slowest for the month since 2010, the data show.
"We need to look at issuance and make sure that that doesn't freeze up," El-Erian said.
The Federal Reserve has raised interest rates three times in 2022 and promises further increases to arrest the hottest inflation since the 1980s.
El-Erian, the chair of Gramercy Fund Management and chief economic adviser at Allianz SE, says that the central bank likely will stick to its plan, slowing the economy, raising the possibility of a recession and presenting "difficulties companies may face in getting new capital."
