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Corporate bond market: The new liquidity trap

The liquidity-starved corporate bond market desperately needs to find a post-regulation equilibrium. Banks just can’t commit capital to market-making. So the smarter investors are looking at ways of delivering it themselves

The corporate bond market has a problem. In August that problem was masked by a record $120 billion of primary issuance worldwide during the month. The problem is not the amount of paper being issued – at least, not yet – it is that in its short trip from issuer to buyer these are virtually the only bonds in the market that are going anywhere.

When Euromoney sat down with the global head of DCM at a large bank earlier in the year there was only one thing on his mind. “ The gap between primary and secondary market volumes is unprecedented,” he fretted. “Secondary volumes are at all-time lows for the last 10 years and primary volumes are off the charts. When you sell bonds to a relative-return fund the idea is that at some point they need to sell them to make that return. But no one is selling – there is no secondary volume.” Fund manager BlackRock recently described today’s bond market as akin to a lobster pot: easy to get into, but almost impossible to crawl out of.

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