03.27.2018

Liquidity Pressures Easing in Corporate Bonds

Liquidity constraints are finally lifting somewhat in the corporate bond market. At least for smaller trades.

Approximately three-quarters of the institutional investors participating in a recent study by Greenwich Associates say they have no difficulty executing corporate bond trades up to $5 million. The consultancy said that is a dramatic improvement from 2016, when only about a third of investors said it was easy to execute corporate bond trades of that size.

“A decade on from the financial crisis that triggered balance sheet reductions by major bond dealers and drained liquidity from fixed-income markets, institutional corporate bond investors are finally feeling some relief,” said Kevin McPartland, Head of Greenwich Associates Market Structure and Technology Research and author of a new report, Electronic Trading Matures for Corporate Bonds.

Kevin McPartland

Kevin McPartland, Greenwich Associates

However, the report concludes that trades over $5 million in size continue to prove difficult for investors to execute. While these large trades only make up 1% of the total orders in the market on a given day, they make up over 40% of the notional traded.  As such, this market segment is increasingly becoming the main focus of corporate bond solutions providers.

Technology Enhances Liquidity

Institutional investors are not relying solely on technology to ease their trading difficulties.  Many are also hoping that regulatory relief from a more markets-friendly Republican Washington will entice traditional bond dealers to rebuild bond inventories and become more active liquidity providers. They also point to ETFs as a new and growing source of fixed-income liquidity.

Looking to the future, it is a combination of technology and behavior changes that will facilitate more liquid markets, as both provide the mechanisms needed for market participants to more efficiently transfer risk—to everyone’s benefit. “If regulations and market conditions move in a direction more supportive of dealers committing capital to market making, that will create a market better than the one the buy side enjoyed in 2006,” McPartland said.

 

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