Illiquidity In Bond Markets
The shrinking volume in secondary bond markets is making the market more illiquid which has investors demanding higher yields. These higher yields force companies to pay out comparable rates for new issues, making raising capital a more expensive proposition.
Trading in the corporate bond market has fallen a third after averaging $26 billion a day in the first eight months of 2007, according to Federal Reserve data on primary dealers.
While corporate-bond trading is shrinking, average daily trading in government securities has risen to about $584 billion this year from $560 billion in the same period of 2007, Fed data show.
The increase in Treasury investment has forced it’s yields down, widening the gap between AAA rated debt and government securities of similar maturities. AAA rated corporations are having to sell new bonds as if they were rated much lower as investors demand higher premiums due to their inability to quickly sell them in secondary markets.
A major reason for the lack of liquidity in bond markets in general has been the fate of the bond insurance industry. The collapse of their credit ratings has put a big monkey wrench in the smooth running operation of bond markets especially in the municipal sector.
There is a lack of trust in credit markets right now and the Fed’s efforts at pumping hundreds of billions in liquidity haven’t had their desired effects. Investors don’t trust credit ratings on securities, lenders don’t trust their borrowers and until that changes the credit markets will continue to seize up.
