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Liquidity poll 2005: The test lies ahead

Investors are now content with the quality of secondary bond markets in Europe. They can transact large sizes on tight bid-offer spreads without moving prices against themselves. But is this just a bull market phenomenon?

Liquidity poll methodology and results

AT FIRST GLANCE the bond markets seem more liquid than ever, with lower volatility, more risk takers and ever-narrowing spreads. Bid-offer spreads are around five basis points on investment-grade credits and down to as little as the equivalent of three cents on AAA bonds. That's a vast improvement from the early days of the euro credit bond market when investors complained about the difficulty of finding a bid for blocks of bonds and discontinuous price movements. Now, Elisabetta Franz, analyst at Generali, says: "Liquidity is not the central issue as far as the investment-grade market is concerned."

Government issuers have required banks to demonstrate their commitment by trading at tight spreads and in large volumes on transparent electronic platforms. Liquidity has improved in the credit markets too.

This improvement has been driven partly by new technology, partly by the introduction of new instruments. For example, in credit default swaps, much of the improvement in spreads and volumes is due to the introduction of the iTraxx system in April.

Andrea Tresoldi, a trader at Capitalia, says: "The exchange has brought wider opportunities for creative investors, allowing us to look at strategies previously only traded by strongly focused houses."

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