Debt investors can breathe a sigh of relief and stop frettingabout liquidity in the market, according to the U.S. Treasury.

Measures of corporate-bond liquidity—typically defined as theability to trade an asset without moving its price—show all iswell, with volumes, sizes, and bid-offer spreads similar to orbetter than historic averages, Jake Liebschutz, director of thecapital markets office at the department, wrote in a blog post onthe Treasury's website. Complaints about and predictions of aliquidity crisis are instead the result of an evolution in the bondmarket, he wrote, alongside Brian Smith, a senior policy adviser inthe same office.

“The available evidence, when viewed holistically and in lightof recent market trends, does not suggest a broad-baseddeterioration in liquidity,” they wrote. Rather, “the corporatebond market is undergoing significant changes that are reshapingthe nature of trading and liquidity provision.”

The Treasury's observations echo those of researchers at theFederal Reserve Bank of New York, who said in October that there is“ample liquidity in corporate bond markets.”

Investor Perspective: Illiquidity Is a Concern

Investors see it slightly differently, arguing that banks havereduced trading as they limit risk taking to meet post-crisisregulations. Market observers have contended that it's becomeincreasingly difficult to trade securities in large sizes, to buyand sell notes quickly, and to establish reliable prices in thehigh-yield and investment-grade bond market.

“I have never seen such illiquidity in off-the-runs,” saidAndrew Brenner, the head of international fixed income for NationalAlliance Capital Markets. Deterioration in the bond market isevident from the number of banks that are cutting back in theirbond units amid a slump in trading, Brenner said.

Goldman Sachs Group Inc. in May extended its reductions infixed-income operations this year to 10 percent. Trading revenuestumbled 37 percent in this year's first quarter from a year earlieramid market volatility and falling asset values, while revenue fromtrading bonds, currencies and commodities plunged 47 percent.Morgan Stanley has also announced cuts in its fixed-incomeoperations.

“There's a reason firms have reduced their footprint in fixedincome secondary trading—no money,” said Brenner. That means“reduced capital and reduced positions and reduced head count, noneof which is good for liquidity.”

The Treasury department instead says the growth of electronictrading, the rise of new trading platforms, and the shifting roleof dealers is changing the face of liquidity.

Liebschutz and Smith say dealers are acting more asagents—matching buyers and sellers—than as principals that take therisk onto their own books as part of the transaction. Concurrently,trading platforms are allowing market participants to transactdirectly with one another while electronic trading is facilitatingprice discovery.

The Treasury will “continue to monitor conditions” in thecorporate bond market, they wrote.

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