ETFs Can’t Fix Low Bond Market Liquidity

October 24, 2014

Industry movers worry ETF trading belies weak bond liquidity.

One theme ran through almost every session at the recent Inside Fixed Income conference: The liquidity that underpins corporate bond ETFs is lacking.

While trading in equity markets has modernized—perhaps to a fault, given the criticism on the need for speed and complex algorithms—trading in bond markets has moved backward over the past few years.

As panelists noted at the conference on Oct. 22 in Newport Beach, California, primary dealers of corporate bonds—giant banks—aren’t making robust markets as they have in past times, partly due to regulation in the wake of the 2008 financial crisis. Note in the graph below how dealer inventories have dwindled in recent years.

Dealer inventory

Meanwhile, corporations have taken advantage of incredibly low interest rates to issue more and more debt.

Corp Outstanding

 

 

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