NEW YORK (Bloomberg) - Bond and currency traders seeking refuge as Britain votes on membership in the European Union may find that the world's financial-market havens aren't so safe.
There are already signs that liquidity, the ability to trade without affecting prices, is deteriorating in some investment oases in advance of Thursday's ballot.
Liquidity has dropped by about a third in European sovereign bonds, according to Mr David Page, a senior economist in London at AXA Investment Managers.
Vanguard Group is hearing from currency dealers that they may provide indicative, rather than firm, prices in the event volatility climbs.
In the pound, which is at the center of global scrutiny, some investors are reluctant to hold spot positions, according to Europe-based traders.
"Everybody's just preparing for the potential of a shortage of liquidity," said Mr Andy Maack, head of foreign-exchange trading at Vanguard in Malvern, Pennsylvania.
"For the first time I can remember, we've actually gotten notices from all our counterparties saying that they might not be able to provide pricing, that their prices might turn into indicative pricing during a period of time, that they might suspend algorithmic trading."
As investors navigate a potential Brexit, worsening liquidity raises the difficulty of unloading or adding positions. It also heightens the risk that there will be repeats of the bouts of turbulence that have rocked global markets in the past year.
Consider that New Zealand's currency suffered its biggest intra-day drop in 30 years in August, the same week that dozens of US exchange-traded funds diverged from the value of their underlying shares.
In January, the South African rand tumbled 9 per cent in 15 minutes before rebounding, and last week, a measure of volatility in Group-of-Seven currencies rose to a four-and-a-half-year high.
Investors can prepare for volatility by running stress tests on portfolios and adjusting positions incrementally as information emerges after the referendum, said Ms Sinead Colton, San Francisco-based head of investment strategy at Mellon Capital.
The challenge for investors battening down the hatches is that everyone wants to buy the same assets, said Mr James Kwok, London-based head of currency management at Amundi.
"It's easy to identify - the Japanese yen is a safe haven, US Treasuries are a safe haven," Mr Kwok said. "The problem is when you have big size, you need to buy enough to hedge your whole portfolio - and at this point, you run into the liquidity problem."
