Bond Liquidity Metrics: Reading Between the Lines

Record breaking totals of volume traded, issuance and notional outstanding suggest that the US corporate bond market is thriving. Notwithstanding a precipitous drop in net dealer positions since the financial crisis, bid/ask spreads are as narrow today as they were in pre-crisis years. But despite the litany of statistical data points and regulatory commentaries that suggest a healthy bond market, industry participants are unconvinced – and rightly so. According to TABB Group research, liquidity has dissipated in many over-the-counter markets, particularly in corporate bonds.

Empirical data available to the trading community today suggests an abundance of liquidity. The story one gets from reading between the lines is far less encouraging, however. Dealer business models have shifted, and the established procedures of trade reporting and post-trade data are unable to capture the evolving dynamic, which in turn misleads regulators and market participants. The tools that participants have relied on in the past to assess liquidity risk and move capital – dealer relationships, real-time and post-trade data, and traditional execution models – may no longer be enough to get the job done. As dealers step back from their role as dependable facilitators of liquidity and providers of pre-trade information, innovative liquidity measurement solutions may step in to fill the gap.

In this TABB Group report, Bond Liquidity Metrics: Reading Between the Lines, TABB Group leverages 2015 survey results from 100 asset managers, dealers, and hedge funds to assess the evolving landscape of the bond market and the tools market participants are utilizing to measure its liquidity. The results suggest the status quo is eroding due to changing market structure. As a result, current inputs are growing less reliable, prompting service providers to enhance their models and deliver more robust tools.