In this note, we calculate several measures of liquidity to shed light on trading conditions in one large and important market: the market for corporate bonds. As uncertainty surrounding downgrades and potential defaults grew during the first weeks of March, and withdrawals from corporate bond funds mounted, we find that dealers became increasingly unwilling to absorb inventory onto their balance sheets.

List of corporate bond market makers that are eligible to trade with the Secondary Market Corporate Credit Facility. 

What would be interesting to see is the execution of this Fed action be a catalyst to finally drag corporate bond trading out of the “relationship age” and into the “information age.” 

Three main questions around execution have been raised by market participants to The DESK: Who will manage the broker list? How will execution quality be judged? How will conflicts of interest be avoided by BlackRock’s Financial Markets Advisory team, when it might buy assets including BlackRock ETFs, or assets it has a view on for investment purposes?

Ten of the world’s largest banks, including JPMorgan Chase and Bank of America, have been sued for allegedly conspiring over nearly 14 years to rig prices in the $9.6 trillion U.S. corporate bond market, costing ordinary investors billions of dollars.

Trading froze when transaction costs rocketed. In some cases, humans had to step in. The bread and butter of their algorithms — corporate data — turned stale in the fastest economic shock in living memory.

The handful of markets in which the Fed has directly intervened by purchasing assets or lending against them have recouped some of their losses since then, a reassuring sign for investors who were taken aback by the indiscriminate selling that occurred throughout much of March.

But in riskier markets that fall outside of the Fed’s purview—including junk bonds, leveraged loans and nongovernment-backed mortgage bonds—the pain has been slower to abate. Some markets remain essentially closed for business, setting off a race against the clock for borrowers to stay afloat.

Disclosed dealers provide the vast majority of liquidity in global corporate bond markets. Under difficult market conditions, though, a Request-for-Quote (RFQ) might receive few or perhaps no responses from disclosed dealers. There are any number of reasons for this including risk limits, shift to manual trading and/or potentially reduced efficiency as employees and traders are working remotely.

Downgrades are outpacing upgrades at the two biggest credit-rating firms by more than 3 to 1 to start the year, the most on a quarterly basis since the depths of the financial crisis, according to data compiled by Bloomberg. At the same time, risk premiums on investment-grade bonds have surged, while junk yields breached 10% for the first time in more than eight years.

Following the example of the European Central Bank, the Fed could add corporate bonds to the list of assets it is buying to restore normalcy to a bruised corner of financial markets that has seen a freeze-up in liquidity amid worries that even large corporations may default on their obligations, according to Hans Mikkelsen, head of U.S. investment-grade strategy at Bank of America Global Research, in a Tuesday note.