November 2, 2015
Bond market illiquidity is a hot topic. The discussion can, however, sometimes be superficial and overly sensational. In this article we cut through to the facts and provide our thoughts on the key liquidity issues facing institutional investors.
Liquidity can generally be defined as a market’s ability to facilitate the purchase or sale of an asset at a reasonable price and time. Common indices of liquidity are (1) the spread between market assets’ bid and ask prices (wider spreads = less liquidity) and (2) the turnover rate -- the ratio of trading volume to outstanding assets (lower turnover = less liquidity). The current turnover rate, in the U.S. corporate bond market , is close to the levels we witnessed in 2008. The dramatic increase in bond market illiquidity has meant it costs more and takes longer to do a trade.