Despite the fact that corporate bond spreads are very tight and defaults are very low, the liquidity in this market is getting thinner and thinner. The side of the corporate bond market is surpassing $10Tn, and delaers inventory is very low, in relative terms $33bn (or 0.33% of outstanding), as you can see in the chart below. This is due to the capital requirements imposed on banks to hold risk assets, which make bond market-making an unprofitable business. At this point, liquidity is a secondary issue because we’re in a buyers market, but eventually it will become the most important factor for the corporate bond market. This can be one of the catalysts for the Fed to accelerate #ratecuts and to slow tapering.
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