0
$\begingroup$

Knowing that bond A is more liquid that bond B, i.e higher volumes are traded on bond A, does this information have any impact on the spread? Can we say that the large volumes traded on A will increase the spread between A and B? Does this work the same as online trading, e.g on Forex market, where EUR/USD will have the lowest spread, due to the greatest liquidity? I'm very confused about that, and hope someone can help.

$\endgroup$
2
$\begingroup$

If a corporate bond is less liquid / harder to source (e.g. it was issued years ago and most people who hold it now intend to hold it to maturity; or there just isn't a lot outstanding) then, ceteris paribus, the bid-ask spread is likely to be wider than comparable bonds; the spread on top of treasury yield is usually wider (to compensate for the risk of holding an asset that might be hard to sell if desired).

The volume (on Trace) is the best first approximation of how hard it is to source some bond, but still not perfect. It may turn out to be hard to find a bond that recently traded a lot and vice versa. For this reason, the relationship between volume and bid-ask spread isn't as clear.

| improve this answer | |
$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.