Liquidity in European and American corporate bond markets continues to improve, trading activity spreads to more bonds, and the valuation gap is expected to narrow

The Zhitong Finance App learned that the liquidity of the US and European corporate bond markets is improving as bonds issued by more and more blue-chip companies become more active. Barclays strategists pointed out that corporate bond trading volume is gradually being scattered from a few popular bonds to more bonds with different maturities. This trend is expected to improve market pricing efficiency and narrow the valuation gap between highly liquid and weak bonds.

According to a research report released by Barclays strategist Zornitsa Todorova on Tuesday, as of October this year, the top three bonds issued by US companies together accounted for about 35% of the company's total bond trading volume, down 5 percentage points from January 2023.

There have been similar changes in the European corporate bond market. Over the past three and a half years, the share of the most actively traded bonds by European companies in the overall trading volume has also declined by about 5 percentage points.

This change shows that investors are no longer concentrating their trading activities on a few of the most liquid bonds, but are beginning to trade more widely other bonds under the same issuer.

However, there are differences in the degree of improvement in liquidity between bonds with different credit ratings. Todorova pointed out that the decline in transaction concentration was mainly in the investment-grade bond market. In contrast, trading activity in the high-yield bond market is still concentrated, and a few popular bonds continue to account for a large share of trading volume.

Furthermore, the bond trading volume of hyperscale cloud computing service providers, including large technology companies, is also often concentrated on a few bonds, and there has not been an equally obvious trend of fragmentation.

For investors, the increase in corporate bond trading activity is of great significance. When more bonds of different maturities under the same issuer have good liquidity, investors can be more flexible in choosing bonds of a specific term to invest according to interest rate trends, credit risk, and changes in yield curves, without having to rely too much on a few of the most actively traded varieties. At the same time, as the liquidity of inactively traded bonds improves, the additional yield premium required by investors due to liquidity risk may also decline.

Todorova said that as trading activity gradually expands from benchmark bonds to other bonds, the valuation gap between actively traded new securities and old securities with relatively poor liquidity may narrow, thereby improving the overall pricing efficiency and market liquidity of the same issuer's bonds.

However, the report also points out that the level of activity in trading different bonds within the enterprise is not completely constant, especially after the issuer introduces new bonds, and the market trading volume may be redistributed.

In the investment-grade bond market, there is a two-thirds chance that a company's most actively traded bonds will still rank among the issuer's top three trading volumes after a month. Over time, however, this persistence will diminish. After three months, the probability that the bond will remain in the top three trading volumes has dropped to 55%.

This means that although some bonds can maintain a high level of trading activity over a period of time, the distribution of liquidity within the enterprise will continue to adjust as new bonds are issued and investors' trading needs change.

Overall, Barclays research shows that the US and European corporate bond markets are showing a trend of more fragmented trading activity. In particular, the investment-grade bond market is showing outstanding performance. As more bonds gain stable trading demand, investors can expect to get more options for terms, and the overall liquidity and pricing efficiency of the corporate bond market may also be further improved.