When dealer inventories shrink, the market can seize up, creating a gap between those who want to exit a position and those willing to enter one. Maturity length also plays a role, as very short-term bills and very long-term bonds often trade less frequently than intermediate-duration securities.
Bond Liquidity Risk Eroding Expected Returns Spread
Investors often flee to the safest assets, such as U. Bonds issued by major sovereign nations usually exhibit great depth, while those issued by smaller corporations often do not.
Unlike credit risk, which questions the likelihood of default, liquidity risk questions the ease of transaction. Investors also prioritize bonds with higher average daily trading volumes, ensuring a ready market.
Bond Liquidity Risk Eroding Expected Returns Spread
Dealers act as intermediaries, providing quotes to facilitate trades, but they widen spreads during periods of uncertainty. Furthermore, structural features such as callability or complex structures can deter trading activity, effectively locking capital away when it is needed most.
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.
