Bond liquidity in US has not deteriorated since financial crisis

Federal Reserve Bank of New York's report on market liquidity concludes bond liquidity in US is not in decline.

The Federal Reserve Bank of New York has found no strong evidence of deterioration in bond market liquidity since the financial crisis, according to its latest report.

The report - published last week - found evidence from measures of depth and price impact of reduced liquidity, but this was “within historical variations and far from crisis levels.”

Focusing particularly on US Treasuries and corporate bonds, the Federal Reserve Bank of New York revealed corporate bond bid-ask spreads and price impact returned to pre-crisis levels after the crisis.

Measures of Treasury bid-ask spreads and yield curve fitting errors were near their lowest levels in over a decade, the report added.

The findings are backed up by a further analysis of TRACE corporate bond transactions from 2003 and 2015, carried out by the Financial Industry Regulatory Authority (FINRA.)

FINRA’s research concluded “most measures suggest a healthy market”, as transaction volumes have continued to grow, the number of trades is rising, bid-ask spreads have narrowed and the impact of trades on prices continues to fall.

The Federal Reserve Bank of New York reiterated dealer balance sheets have “undergone dramatic changes” and funding cost metrics like interest rate swap spreads indicate increased balance sheet costs.

“However, our findings suggest that these dislocations have not spilled over to traditional liquidity measures in the Treasury and corporate bond markets,” the report said.