Three quarters of the nearly 60 global investors participating in the Greenwich Associates 2015 Corporate Bond Liquidity Study experienced a decline in dealer-provided liquidity in the past year. Most of these institutions see this “new normal” as a risk to their portfolio, and over half believe dealer liquidity will decline further.

A true solution to the problem of scarce liquidity will require bolder and more innovative thinking. Ultimately, the most effective lubricant for the bond market would come via adjustments to Basel III and the Volcker Rule. If banks could hold inventory more cheaply, without the worry that holding that inventory to facilitate client trading would not be viewed by regulators as proprietary trading, then the market would quickly open up. 

“Smart money doesn’t rely on regulatory fixes, however,” says Kevin McPartland, Head of Market Structure and Technology Research at Greenwich Associates, and author of the new report, In Search of New Corporate Bond Liquidity. 

This new Greenwich Report highlights several innovative approaches that could help solve the problem including the creation of a liquidity reserve at the time of new issue, issuing bonds with standard maturities, firming up the single-name CDS market and giving the sell side access to buy side inventories as an aid to market making

“Whether the solution comes from one of these innovations or from some other avenue, the market must continue to evolve via new tools and approaches that ensure credit continues to flow without interruption,” says Kevin McPartland.