Investing.com - Financial Markets Worldwide

Large Corporate Bond Issues Dominating Secondary Market

Published 08/21/2012, 03:04 AM
Updated 07/09/2023, 06:31 AM

Earlier this year we discussed how the Volcker rule combined with Basel III is already reducing corporate bond liquidity by diminishing dealers' ability to make markets. It's just one of those "unintended consequences." Dealer inventories, which are essential for market making, have shrunk to the lowest level in 10 years. Some, including people at the Fed, have suggested that non-bank entities will step in to take the dealers' place as market makers. That is unlikely to happen in the near future.

One question that people are asking is why haven't we seen more lobbying from the corporate sector against the Volcker rule. There are multiple reasons for this, including corporations' unwillingness to put their reputation on the line by lobbying against this populist anti-bank regulation. But one of the key reasons is that the biggest impact will be on the medium to smaller US firms who simply don't have the resources to battle this legislation. With limited inventories the dealers increasingly make markets only in the largest bond issues, particularly those traded by the large corporate bond ETFs (LQD, HYG, etc.).
Large issues as percentage of total trading
As liquidity in the smaller bond issues declines further, investors will demand a premium to hold them. Small to medium sized US firms will be disadvantaged relative to their large competitors due to higher cost of funds.

Latest comments

Loading next article…
Install Our App
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2025 - Fusion Media Limited. All Rights Reserved.