The Search for Corporate Bond Liquidity: Derivatives to the Rescue?

There has probably been no subject more discussed at fixed income conferences or in the market press than the perceived lack of liquidity in the corporate bond markets worldwide. But we have to ask some important questions about liquidity. In particular, we have to ask:

• What is liquidity?
• How do we measure it?
• What is the status of corporate bond liquidity?

This market note answers those questions, and looks at a couple of derivatives that purport to bring liquidity to this market. Finally, it determines that the use of derivatives as liquidity sources in the corporate bond market is dependent on a couple of critical developments.