Liquidity Risk Stalks High-Grade Credit, According to Bank of America | WORLD

The rapid spread of the delta variant and the possible decline in the purchase of Federal Reserve bonds are not the only risks that lie ahead for US corporate debt.

Investors also face deteriorating liquidity conditions, according to a new report from strategists at Bank of America Corp.

“Liquidity risk in investment grade debt is high, especially for older bonds“, wrote Hans Mikkelsen, credit strategist BofA in a report.

Inventories of top-rated corporate bond traders have plummeted to 0.2% of total market trading volume, from roughly 5% in 2007, according to analysis by BofA data from the Fed and the financial industry regulatory authority.

The gap between bid and ask prices as part of investment grade spreads, a measure of liquidity, is high, he wrote. Mikkelsen in the August 18 report.

“Trading has more recently focused on the more liquid issues, and the trading ratio of previous bond issues remains below 2019 levels.“, wrote.

As more investment grade debt is being traded, the bond market is growing rapidly. Trading volume as market share fell to 0.37% in the first half, compared to 0.39% last year, according to BofA.

From a fundamentals point of view, the news is better. The total debt of all US nonfinancial companies has increased 30-fold to about $ 11.2 trillion in the past 50 years, according to another BofA report released Monday.

But corporate debt divided by share capital, a common measure of leverage, is 25%. That’s less than the 30% to 60% range of the past 25 years, the analysis shows. BofA.