We saw a big drop in average bid-ask spreads (>7%) for US investment grade (IG) last week, possibly a response to the massive levels of issuance that came out in the first week of September, according to data from MarketAxess’s CP+ pricing tape. Smaller drops happened in US high yield and EU IG, while EU HY bid ask spreads increased.
More interesting is the week-on-week volatility of these bid-ask spreads, as this indicates the scale of pricing differences over time. By tracking the percentage changes in each category, we can see which of these creates the most risk or opportunity for traders. The mean average for week-on-week change across all US and EU markets is -1% but the ranges between types of groups.
It is apparent that US high yield has the greatest volatility in liquidity costs, as well as offering better returns for investors than IG markets. It sees swings of up to 13% and down by the same amount within a week in May. However, this tightens considerably over the summer period, and both US instruments classes have lower trading costs by the start of September.
EU HY sees one double-figure drop (10%) but is more commonly in the 1% range up or down.
By contrast, the IG markets have a far more limited range – Europe sees four high single figure moves, the US just one.
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