Furthermore, structural features such as callability or complex structures can deter trading activity, effectively locking capital away when it is needed most. Most bond trading occurs over-the-counter, rather than on a centralized exchange like stocks.
How Bid-Ask Spread Widening Amplifies Bond Liquidity Risk
Dealers act as intermediaries, providing quotes to facilitate trades, but they widen spreads during periods of uncertainty. Maturity length also plays a role, as very short-term bills and very long-term bonds often trade less frequently than intermediate-duration securities.
A deep market allows for large transactions to occur with minimal price impact. Bonds issued by major sovereign nations usually exhibit great depth, while those issued by smaller corporations often do not.
How Bid-Ask Spread Widening Drives Up Bond Liquidity Risk Costs
Understanding the Mechanics of Market Depth Market depth refers to the number of buy and sell orders sitting at different price levels in the order book. In contrast, a shallow market is prone to significant price volatility from relatively small trades.
More About Bond liquidity risk
Looking at Bond liquidity risk from another angle can help expand the discussion and give readers a second clear paragraph under the same section.
More perspective on Bond liquidity risk can make the topic easier to follow by connecting earlier points with a few simple takeaways.
