Liquidity in fixed income

Liquidity in fixed income is a topic that investors have increasingly focused on since the onset of the credit crisis, and rightly so.

The market is unlikely to see a return to pre-crisis levels of liquidity any time in the near future. The fixed income markets trade almost entirely “Over-the-Counter” (or “OTC”) via banks and brokers; both of which have come under pressure to raise capital levels and reduce risk. As trading activities are one of the most expensive uses of that valuable capital, and deemed to be a significant source of additional risk, it is no surprise that the amount of balance sheet and liquidity provided by banks and brokers has been substantially (and permanently) cut. In addition, the number...