NDR Credit Comment: Is bond market liquidity deteriorating?
Liquidity in the US Treasury market has risen but it's a different story for corporate bonds, Ned Davis Research reveals.
Joseph F. Kalish, Chief Global Macro Strategist
Traders are always worried about liquidity, or the ability to enter and exit positions without disturbing the markets. Highly liquid markets are easy to trade; illiquid markets are more risky. To gauge liquidity, we calculated primary dealer positions to transactions ratios for each of the major bond market sectors.
Similar to an inventory/sales ratio, we took the absolute value of the average daily positions of the primary dealers and divided it by the dealers’ average volume over the past year. Based on this measure, liquidity has been high or improving for governments, agencies, and MBS.
But liquidity in the corporate sector has deteriorated to its worst level since 2003. A recent Treasury report confirmed the reduction in corporate bond liquidity, citing wider bid/offer spreads, increased concentration of trading volume, and lower turnover for off-the-run investment grade corporates.
If you don’t want to end up like a “beached whale” this summer, it’s a good idea to check the liquidity of the securities you’re trading.
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