Week InReview: August 11, 2017

On Bond Market Liquidity "In corporate bond markets, trading activity and average transaction costs have generally improved or remained flat. More corporate bond issues traded after regulatory changes than in any prior sample period. In the post-regulatory period, we estimate that transaction costs have decreased (by 31 basis points (bps), to 55.4 bps round-trip) for smaller trade sizes ($20,000) and remain low for larger trade sizes relative to the precrisis period (estimated at 5.7 bps round-trip for trades of $5,000,000, compared to 5.8 bps pre-crisis)." "Dealers in the corporate bond markets have, in aggregate, reduced their capital commitment since the 2007 peak. This is consistent with the Volcker Rule and other reforms potentially reducing the liquidity provision in corporate bonds. It is also consistent with alternative explanations, such as an enhanced ability of dealers to manage corporate bond inventory, shorter dealer intermediation chains associated with electronification of bond markets, crisis-induced changes in dealer assessment of risks and returns of traditional market making, and the effects of a low interest rate environment. These alternative explanations are not mutually exclusive or necessarily fully independent of regulatory reforms, so distinguishing between these potential explanations from the market trends data is not possible."

From a 315-page report on access to capital and market liquidity issued by the SEC's Division of Economic and Risk Analysis

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