Bond market liquidity is a tool which increases financial tractability in arranging cost effective debt finance for companies and the government. As a result, it is related to the monetary policy and the financial stability of a country.
Deficiency in the market liquidity can cause massive price volatility. When the bond market liquidity is not sufficient, the open market operations of the central banks can find difficulties. Thus, bond market liquidity provides encouragement to the tools of financial mediation, making these tools very essential as they are related to market pricing, effective borrowing and investment practices.
There are also many way in which bond market liquidity may be reduced. Among these, the primary is a lack of new bonds being issued. Some countries have required minimums for issuing bonds.
At the same time, there are companies which prefer to generate income through sources outside the bond markets. There are many factors related to the development and maintenance of a certain level of bond market liquidity.
Some of these important factors are the following:
Benchmark Yield Curve:
This is a rating of the amounts produced by the different standardized bond issuers. These bond issues are typically very simple and attract the investors easily. If these benchmark curves are used efficiently, they can encourage financial efficiency. Once established, the yield curve’s length should be maintained properly to keep the bond market liquidity stable.
The amount transparency in the market policies of the bond issuer can encourage the investor and help in maintaining bond market liquidity. The information on the condition of the market and the expected performance of the bond helps the investor to make decisions regarding the market. Transparency is very important in both the primary and secondary bond market. To maintain the clarity of the market, the market regulators play a major role in maintaining bond market liquidity.
Last Updated on : 10th July 2013