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Liquidity pressures ease in corporate bond market

A study by Greenwich Associates found that liquidity is finally improving for corporate bond investors, at least for smaller trades. The analysts polled institutional investors and found that about three-quarters said they have no difficulty in executing corporate bond trades up to the value of $5 million. According to Greenwich, this 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”.

Recovery 10 years on from financial crisis

Greenwich's Kevin McPartland said: “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.”

The report – Electronic Trading Matures for Corporate Bonds – states: “Electronic trading over the past few years has eased the buy side’s ability to execute odd-lot orders. Many of those same tools have now found their way into the block-trade ecosystem, with over three-quarters of corporate bond investors feeling it is easy or extremely easy to execute orders up to $5 million in size. This is a stark contrast to the sentiment only a year ago.”

Could ETFs provide liquidity?

But trades over $5 million in size continue to prove difficult for investors to execute, according to the report. While these large trades only make up 1 per cent of the total orders in the market on a given day, they make up over 40 per cent of the notional traded. As such, this market segment is increasingly becoming the main focus of corporate bond solutions providers. The report adds that investors are also hoping for regulatory relief in the US from a more markets-oriented Republican government, which could boost liquidity. Investors are also looking to exchange-traded funds (ETFs) as a new and growing source of fixed-income liquidity.


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