Investors as a liquidity backstop in corporate bond markets

Carole Comerton-Forde (), Billy Ford (), Thierry Foucault () and Simon Jurkatis ()
Additional contact information
Carole Comerton-Forde: University of Melbourne
Billy Ford: None
Thierry Foucault: HEC Paris
Simon Jurkatis: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 1126, Bank of England working papers from Bank of England

Abstract: Investors act as a liquidity backstop in the corporate bond market. By providing liquidity, investors help ease dealers’ balance sheet constraints, especially during market stress. During the March 2020 Dash-for-Cash, in bonds where investors stopped providing liquidity, transaction costs rose by 38%. We find the composition of types of liquidity providers – rather than just their presence – shapes trading costs. Dealers relying on flexible-mandate investors, such as hedge funds, are more resilient to liquidity shocks. Dealers offer discounts to investors for past liquidity services to maintain liquidity provider networks. These discounts represent two thirds of relationship discounts.

Keywords: Bond markets; liquidity; client-sourced liquidity; balance sheet cost (search for similar items in EconPapers)
JEL-codes: G10 G14 G23 (search for similar items in EconPapers)
Pages: 62 pages
Date: 2025-05-16
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:1126

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