US Corporate Bond Markets: Bigger and (Maybe) Better?

Maureen O'Hara and Xing (Alex) Zhou

Journal of Economic Perspectives, 2025, vol. 39, issue 2, 215-34

Abstract: The US corporate bond market has expanded significantly, fueled by electronic trading, institutional innovation, and growing retail participation via mutual and exchange-traded funds. These developments have improved efficiency by reducing costs and enhancing transparency, yet they have also introduced new vulnerabilities. The market's shift from relationship-based to transaction-based trading has weakened its ability to absorb stress, especially during periods of widespread selling. We examine the structural changes that have reduced dealer intermediation, the limited liquidity benefits of electronic platforms, and the destabilizing role of fund flows. The COVID-19 crisis exposed these weaknesses, prompting the Federal Reserve to act as a "market maker of last resort." We argue that while the market is "better" in many ways, enhancing resilience through transparency and long-term investor participation is essential for future stability.

JEL-codes: G12 G23 G41 I12 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1257/jep.20251439

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