By Sviatoslav Rosov, PhD, CFA
The corporate bond market liquidity debate is complicated and controversial. Technological developments, regulator actions, and macroeconomic forces have all been cited as causes of deteriorating market quality. Others argue that market quality has not deteriorated at all. The International Organization of Securities Commissions (IOSCO) has recently joined the debate with the release of a report on it examination of secondary corporate bond market liquidity.
Other recent work on this topic includes the Bank for International Settlements (NASDAQ:BIS) report on the implications of electronic trading in fixed-income markets, and the International Capital Market Association (ICMA) study of the European secondary corporate bond market. Furthermore, it is an important topic in the European Union's ongoing Capital Market Union (NYSE:CMU) agenda, which aims to improve the effectiveness of EU markets in allocating capital.
In order to contribute to this important debate, CFA Institute developed a member survey on the issues surrounding bond market quality. The members surveyed were a pool of 3,881 volunteer CFA Institute members with a declared interest in capital markets issues. The response rate was 13.2% with 513 members participating.
The results of the survey are captured in our Bond Market Liquidity Survey Report. The following summarizes the key findings.
Key Survey Findings
Respondents from the Americas region (AMER) and Europe, Middle East, and Africa region (EMEA) reported that over the last five years they have observed the following:
- A decrease in liquidity of high-yielding and investment-grade corporate bonds and no change in the liquidity of government bonds
- A decrease in the number of active dealers making markets
- An increase in the time taken to execute trades and a lower proportion of bonds being actively traded
- A higher proportion of unfilled orders
Respondents from the Asia-Pacific region (NASDAQ:APAC) reported that over the last five years they have observed the following:
- No change in the liquidity of high-yielding corporate bonds but an improvement in the liquidity of investment-grade corporate and government bonds
- An increase in the number of active dealers making markets
- No change in the time taken to execute trades and a higher proportion of bonds being actively traded
- No change in the proportion of unfilled orders
Some interesting responses were received for questions surrounding macroeconomic and regulatory impact on bond market quality. Respondents from AMER and EMEA noted that bank capital and liquidity regulations have had a significant impact on bond market liquidity and that the focus of policymakers should be on removing impediments to the smooth functioning of institutional wholesale markets. But APAC respondents indicated that there is no single factor that has had a very significant impact on bond market liquidity. They also identified encouraging retail investor participation as a more important policy priority than improving institutional wholesale market functioning.
A broad brush reading of the survey results seems to suggest that bond market quality concerns are mostly an AMER and EMEA problem, with APAC respondents experiencing relatively more positive changes in recent years. We hope the results of this survey help to add color and another real-world data point to this debate, which is likely to continue for some time.