The bond market liquidity

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By Anastasia Amoroso, Global Market Strategist, JP Morgan Asset Management

Living in a less liquid world: What is bond market liquidity and why is it lower today?

If you ask three people in different parts of the capital markets to define bond market liquidity, chances are you will receive three different answers.

Some describe liquidity as the ability to get the trade done no matter the price; others cite the price and the cost of getting the trade done (the bid-ask spread); and still others talk about the depth of the market, which can be observed by looking at the average trade size.

All of these definitions describe a different facet of liquidity. We prefer a definition of our colleague, Nicholas Cox, Global Head of Fixed Income Trading at JP Morgan Asset Management. He put it this way: “Can I get the size I want at the price I can accurately predict?”

The answer to that question today is a solid maybe.

The bid-ask spread, which has moved tighter since the crisis in, for example, US high yield bonds, does not point to any unusual developments. However, the average trade size in the corporate (and Treasury) bond market does. The average trade size in both markets is smaller today than it was pre-crisis.

The depth of the market has diminished, complicating the ability of an investor to promptly execute the trade if the intended size is large. Today’s smaller trade size reflects deleveraging and regulatory change, which means that dealers are not in a position to absorb and hold large blocks of inventory.

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