With banks and brokers under pressure to raise capital levels and reduce risk in the aftermath of the credit crisis, many trading activities have been substantially (and permanently) cut back.
As fixed income trades almost exclusively over the counter (OTC), the loss of market participants has caused a serious drought in liquidity. It is difficult to quantify the decline exactly, but an analysis of the changes in bid-offer spreads does illustrate a definitive change. Investment grade corporate bonds have perhaps seen the biggest withdrawal of liquidity. Today, the bid-offer spreads can be anything from 10 cents to a whole point, but the size available on each side has dropped considerably. A new issue in euros may well trade in sizes of €10m, but that figure could halve ...
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