How New Bond Issuance Influences the Liquidity of Covered Bonds

Abstract

This study shows how primary market supply influences the secondary market liquidity of outstanding bonds. Liquidity is higher around new bond issuance by the same issuer and in the same maturity segment. It rises once the new issue is priced and remains elevated for several days. The effect is mostly attributed to switch trades between old and new bonds. It increases by the volume issued and decreases by the amount of similar paper outstanding. The liquidity surge is positively linked to the new bond’s attractiveness; it is stronger during times of positive market sentiment.

TOPICS: Project finance, statistical methods, credit risk management

Key Findings

• • Liquidity is higher around new bond issuance by the same issuer and in the same maturity segment.

• • The supply-liquidity effect increases by the volume issued and decreases by the amount of similar paper outstanding.

• • The liquidity surge is positively linked to the new bond's attractiveness, and it is stronger during times of positive market sentiment.