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Here are some interesting lines from Apollo’s chartmeister Torsten Sløk, showing the spread between the bids and the asks for off-the-run and more liquid investment-grade corporate bonds (high-res link):
We knew that credit markets were belatedly reacting to the tariff shenanigans — as MainFT reported earlier today, the junk bond market has been completely frozen — but off-the-run liquidity in investment grade debt being as bad as it was in March 2020 is pretty staggering.
For people unfamiliar with the vernacular, “off-the-run” is what older, staler bonds are called. Bonds are typically as their most heavily traded when they are freshly issued — “on-the-run” — but over time they tend to settle down in long-term portfolios inside pension plans and insurers and whatnot.
That means that they are always less “liquid”, and banks offer sloppier prices. So while you might be able to buy $100mn of a newly issued IBM bond for $100.05 or sell it for $99.95mn, if you need to trade an old, stale one the prices might be something more like $100.1mn or $99.9mn.
In the chart above, Apollo has categorised liquid corporate bonds as those with a nominal value of at least $1bn that have been issued in the past year, while its definition of off-the-run are bonds issued more than two years ago and for less than $900mn (these make up about half the investment-grade corporate bond market).
We have some questions though. First of all, as bad as the recent newsflow has been, it’s hardly Covid-19 bad. But of all, it’s intriguing that bid-ask spreads for liquid bonds have only widened a little bit, and remain tighter than they were at the peak of the 2023 banking collapses. Why? Here’s Sløk’s non-answer.
The gap between liquid and illiquid bonds is particularly noteworthy. In 2020, the bid-ask spread widened across the whole market. But this time around, transaction costs have increased materially more for off-the-run paper. This highlights the growing liquidity divide in the public IG market. Liquidity in on-the-run bonds has improved, but off-the-run paper has become virtually untradeable and effectively a buy-and-hold investment.
But why? Why have liquid bond quotes stayed so remarkably tight compared to off-the-runs? In 2023 they actually ballooned more. We get why credit trading volumes have hit new records, but was everyone just trying to ditch off-the-runs and eventually making them “untradeable”, as Sløk puts it?
We’ll do some digging, but if you have a theory then please post it in the comments.