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Investors as a liquidity backstop in corporate bond markets

Author

Listed:
  • Comerton-Forde, Carole

    (University of Melbourne)

  • Ford, Billy

    (None)

  • Foucault, Thierry

    (HEC Paris)

  • Jurkatis, Simon

    (Bank of England)

Abstract

Investors act as a liquidity backstop in the corporate bond market. By providing liquidity, investors help ease dealers’ balance sheet constraints, especially during market stress. During the March 2020 Dash-for-Cash, in bonds where investors stopped providing liquidity, transaction costs rose by 38%. We find the composition of types of liquidity providers – rather than just their presence – shapes trading costs. Dealers relying on flexible-mandate investors, such as hedge funds, are more resilient to liquidity shocks. Dealers offer discounts to investors for past liquidity services to maintain liquidity provider networks. These discounts represent two thirds of relationship discounts.

Suggested Citation

  • Comerton-Forde, Carole & Ford, Billy & Foucault, Thierry & Jurkatis, Simon, 2025. "Investors as a liquidity backstop in corporate bond markets," Bank of England working papers 1126, Bank of England.
    • Handle: RePEc:boe:boeewp:1126
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    File URL: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2025/investors-as-a-liquidity-backstop-in-corporate-bond-markets.pdf
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    More about this item

    Keywords

    Bond markets; liquidity; client-sourced liquidity; balance sheet cost;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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