11 Nov 2013

Trading Bonds

As we have said, there is a secondary market in bonds. However, the ease with which one can trade different types of bond varies widely. Bonds that are liquid are ones which are easy to trade. Such bonds would trade in large volumes with large individual ticket sizes, a narrow spread between the bid and offer price (i.e. the buy and the sell price), many market makers being willing to make a price, and the ability to trade in large size without moving the price significantly. Government bonds are usually the most liquid bonds. Most corporate bonds become fairly illiquid after issuance, particularly if they have been purchased by “buy and hold” investors who, by their nature, trade infrequently. Complex securities, such as structured credit instruments are not very liquid. The lack of liquidity in these bonds came into sharp focus as the fallout from the sub-prime crisis in the United States spread in the second half of 2007. 

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