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Citigroup Sees U.S. Market Liquidity Drying Up: Chart of the Day

Investors are demonstrating a reluctance to trade in U.S. financial markets that’s “unlikely to improve substantially” any time soon, according to Mike Lee, a Citigroup Inc. analyst.

The CHART OF THE DAY shows how Lee reached his conclusion: by tracking the Citigroup U.S. Market Liquidity Index, derived from five indicators in the swap and option markets. Within the past two weeks, the index rose to its highest level since May 2009, when a global financial crisis sparked by falling U.S. home prices was ending.

“Deteriorating economic conditions and volatile markets have raised investor fears about a repeat,” Lee, based in New York, wrote two days ago in a report. That concern has weighed on liquidity, or the ease of buying and selling, he wrote.

Citigroup’s index, which rises when liquidity shows signs of drying up and falls when it improves, reached last month’s peak on Aug. 25. The increase resulted mainly from a surge in the Chicago Board Options Exchange Volatility Index, known as the VIX, according to the report.

The VIX, calculated from prices for Standard & Poor’s 500 Index options, rose 25 percent in August to 31.62. The monthly advance was the fourth in a row, marking the longest series of gains since 2002.

Corporate bonds are represented in the Citigroup gauge by the Markit CDX North America Investment Grade Index, based on rates for credit default swaps. Ten-year Treasury bond futures, interest-rate swaps and rate-swap options are included in the calculations as well.

To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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