This premium has shrunk as electronic credit trading has boomed, bringing more liquidity to the market, according to the report
Published Sat, Aug 2, 2025 · 10:52 AM
[NEW YORK] The additional compensation investors demand to own tougher-to-sell investment-grade bonds has vanished, thanks to a boom in electronic and portfolio trading, according to Barclays.
The so-called illiquidity premium on such deals dropped to nearly zero in July, from 11 basis points between 2018 and 2024 and 35 basis points between 2011 and 2017, Barclays analysts, including Zornitsa Todorova and Andrea Diaz Lafuent,e wrote in a note this week. That excludes periods of heightened volatility, such as the Covid-19 pandemic.
This premium has shrunk as electronic credit trading has boomed, bringing more liquidity to the market, according to the report.
“The illiquidity premium that once drew pensions and insurers to public markets is gone,” wrote the analysts.
Half of US high-grade bonds now trade electronically and exchange-traded funds are injecting steady liquidity, boosting flows, according to Barclays. Portfolio trading now accounts for more than 20 per cent of high-grade volumes, up from 10 per cent in 2023, the analysts wrote. Computer-driven programs are also accounting for more and more of the activity in bond markets.
The shift is driving more trading, lowering transaction costs and reducing the share of bonds that rarely trade. The monthly share of non-traded US high-grade bonds has dropped twenty-fold to 0.1 per cent, from 2 per cent a decade ago, according to a separate note on Aug 1. Daily share of illiquid bonds is down three-fold to 10 per cent from 30 per cent in the same period.
“Looking ahead, it could lower funding costs for smaller public issuers, as investors begin to price in stronger market liquidity,” wrote the analysts. BLOOMBERG
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