The Rieger Report: Factors Impacting Bond Liquidity

by: S&P Dow Jones Indices

By J.R. Rieger

Issuer name recognition and entity size seem to be factors in bond liquidity and as a result may be important considerations in index design. Tracking the trade activity of corporate bonds issued by the "blue chip" companies of the S&P 500 Index indicates liquidity is improved for these bonds over other bond issues.

Of course, when making decisions about depth of liquidity there are some important elements of the markets to consider:

  • There are many issuers of bonds and different types of issuers.
  • Some issuers borrow infrequently and others come to the bond markets with higher frequency.
  • Some issuers are well known entities to the investor community; others are smaller and less known.
  • Many bonds can be issued from one entity, each with differing term structures (deal size, par amount, maturity, coupon, as well as redemption and security provisions to name a few).
  • Bonds are often buy and hold assets.
  • Bonds often represent long term obligations intentionally designed with maturities that match the useful life of the projects they fund.

Issuer name recognition and entity size as a factor can be illustrated by comparing the trade volume data of two indices: the S&P 500 Investment Grade Corporate Bond Index and the broader S&P U.S. Issued Investment Grade Corporate Bond Index. Both have the same inclusion rules with the difference being the bonds in the S&P 500 Index must be bonds from the S&P 500 companies.

Table 1: Key index statistics as of December 2015:

Source: S&P Dow Jones Indices, LLC. Data as of December 31, 2015.

Source: S&P Dow Jones Indices, LLC. Data as of December 31, 2015.

What the data is telling us:

Table 2: Trade data statistics for June-December 2015

Source: S&P Dow Jones Indices, LLC and TRACE. Data as of December 31, 2015.

Source: S&P Dow Jones Indices, LLC and TRACE. Data as of December 31, 2015.

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