What No One Ever Says About Corporate Bond Market Liquidity

Everyone’s worried about bond market liquidity. That much we know. Whether it’s high-yield corporate bonds sold by junk-rated companies or the ultra-safe Treasuries sold by the U.S. government, investors’ ability to buy and sell these securities without "overly" affecting prices has moved to front and center of the proverbial market concerns.

The causes, we hear, are myriad. Regulation that has curbed banks’ ability to hold vast sums of bonds on their balance sheets is often blamed. We are also told that years of low interest rates have herded investors to the same positions, spurring billions of dollars worth of inflows into global bond funds. The worry is that should those inflows reverse, bond prices could hit an air pocket and face a rapid descent.