* Investors aim to preserve profits

* Banks try to shrink balance sheets

* Risk of low liquidity and high volatility By Jane Merriman

LONDON, Nov 4 (Reuters) - The credit markets can expect to see liquidity fall and volatility rise more than is usual this year-end as banks and investors pull in their horns to preserve fat profits from the corporate bond rally that began in March.

Banks, battered by the crisis, will particularly step back from taking big positions as they try to shrink balance sheets to bolster capital ratios ahead of their financial year-ends in December, analysts said.

"All these factors imply for us that market liquidity probably won't be great," said Hans Lorenzen, credit strategist at Citi.

"Real money investors have lots of cash, but if they remain a little cautious near-term, then it is not easy to see who is going to be taking the other side if banks and other investors want to reduce exposure into the year-end," said Lorenzen, who remains bullish on the credit market outlook going into 2010.

The end of 2009 looks much less scary in terms of liquidity than the end of 2008, when central banks and governments were battling to prevent a global financial meltdown.

"Most trading books will be sitting on a very nice profit, so we would expect even thinner liquidity in December as people try to focus on wealth preservation and bonus preservation - dare I say it," said Phil Milburn, fixed income fund manager at asset manager Aegon.