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How liquid should a corporate bond be? 

December 17, 2013
Christopher Whittall, IFR Asia

The buyside is adapting to a less liquid bond market, undermining dealers’ warnings.

Here’s a stock answer to the headline question: quite a bit more liquid than real assets such as residential property; quite a bit less liquid than equities.

But let’s pose the same question in a slightly different way. How much should banks intermediate in secondary credit markets?

That’s a trickier question. But that’s exactly what regulations currently taking hold – from Basel III to the Volcker Rule – in effect determine, as well as, by extension, the liquidity of corporate bonds.

The case for the defence proffered by bankers runs as follows: liquidity is a good thing. It allows asset managers and pension funds to buy and sell bonds and rejig their investment portfolios. Having a liquid pool of bonds also allows companies to issue debt more cheaply, bringing tangible benefits to the real economy.

Read more: IFR Asia

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