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Mr. Frank Hespeler and Felix Suntheim
This note analyzes the stress experienced (and caused) by open-end mutual funds during the March COVID-19 stress episode, with a focus on global fixed-income funds. In light of increased valuation uncertainty, funds experienced a short period of intense withdrawals while the market liquidity of their holdings deteriorated substantially. To cover redemptions, afflicted funds predominantly shed liquid assets first—for example, cash, cash equivalents, and US Treasury securities. But forced asset sales amplified price pressures in markets and contributed to liquidity falling across fixed-income markets. This drop in market liquidity, as well as the general stress in financial markets, may have led to fund investors becoming even more sensitive to challenging portfolio performance and encouraged further withdrawals. Only after central banks intervened, directly and indirectly supporting asset managers, did liquidity and redemption stress subside. Overall, the March episode validated the financial-stability concerns about liquidity vulnerabilities in the fund industry and calls for further action to address them.
Mr. Frank Hespeler and Felix Suntheim
This note analyzes the stress experienced (and caused) by open-end mutual funds during the March COVID-19 stress episode, with a focus on global fixed-income funds. In light of increased valuation uncertainty, funds experienced a short period of intense withdrawals while the market liquidity of their holdings deteriorated substantially. To cover redemptions, afflicted funds predominantly shed liquid assets first—for example, cash, cash equivalents, and US Treasury securities. But forced asset sales amplified price pressures in markets and contributed to liquidity falling across fixed-income markets. This drop in market liquidity, as well as the general stress in financial markets, may have led to fund investors becoming even more sensitive to challenging portfolio performance and encouraged further withdrawals. Only after central banks intervened, directly and indirectly supporting asset managers, did liquidity and redemption stress subside. Overall, the March episode validated the financial-stability concerns about liquidity vulnerabilities in the fund industry and calls for further action to address them.
Mr. Frank Hespeler and Felix Suntheim

conditions had not improved following massive central bank interventions. When looking at the flow-performance relationship, fund investors seem to have responded to this risk very consciously, by reducing their holdings in underperforming funds already exposed to high redemption pressure. Even though funds only marginally engaged in large-scale sales of low-liquidity assets there was some evidence of price declines in markets following selling pressure, which highlights the risk of fire sales if funds must unload relatively illiquid assets quickly. Looking ahead, a

International Monetary Fund

into consistent large losses. Because the banks are already significantly undercapitalized and unprofitable, it was decided not to conduct a stress test. A stress test in the context of Algeria would be more about the sustainability of public finances than financial system resilience. Generally available data show banks to have satisfactory liquidity . However, the restructuring bonds issued by the Treasury should be classified as fairly low-liquidity assets, because of the absence of secondary market. Furthermore, if one discounts the cyclically comfortable