"The changing nature of market liquidity – understanding banks’ corporate bond inventory"

From Bond Vigilantes:

When looking at the risk premium embedded in the extra return you receive in owning corporate debt versus “risk free” governments, one of the factors that we have to take into account is the less liquid nature of corporate bonds. This adds to the potential risk premium from a liquidity and transaction cost perspective. A constant theme since the financial crisis has been the belief that the crash removed the abundant liquidity of the corporate bond market, and therefore corporate spreads should now be intrinsically wider.

The first chart below shows the annual moving average of dealer inventory from 2006 to date, this peaked near $200 billion and has collapsed towards $20 billion, a 90 percent drawdown in committed capital. By definition, this does not sound good for liquidity and corporate bond risk premiums.

The second chart shows actual dealer volume over the same period. This has roughly doubled from peak to trough from circa $12.5 billion to $25 billion....

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