Today's credit markets offer cheaper, more liquid access to those who know where to look
It is no secret that the hunt for yield over the past decade or so has driven many investors into higher-risk areas of the credit market, such as high yield and emerging market debt. One of the perceived hazards of such assets is limited liquidity.
In the less liquid areas of the market, the impact of trading costs represents a significant hurdle for fixed income investment managers to overcome in order to outperform their benchmarks. When trading corporate or credit sensitive bonds, the relative illiquidity of these instruments leads to higher transaction costs, which can have a corrosive impact on performance.
However, recent changes in the bond market and the fixed income exchange traded funds (ETF) market have created an opportunity to improve liquidity and reduce transaction costs, with the ultimate goal of maximizing returns earned. Here, we explore how market dynamics have evolved and ways investors can seize these opportunities to access liquidity, even in a segment of the market where they'd least expect to find it.
The bond ETF market has grown in recent years, leading to deeper market liquidity.
U.S. bond ETF market growth (01/03-03/17)
Source: Bloomberg, as of March 31, 2017.