Debunking the Myth
Liquidity is defined as the speed at which an asset can be converted into cash at its intrinsic value. Stocks are considered highly liquid since they can be sold in rapid fashion over an exchange that brings many buyers and sellers together. A house or a work of art are considered less liquid since it usually takes time to find buyers and complete transactions.
Fixed income securities occupy a wide stretch of the liquidity spectrum. For instance, some parts of the markets, like Treasuries or other sovereign bonds, are among the most liquid of all assets within capital markets. The daily trading volume in the Treasury market alone has ranged from $500 billion to $1 trillion in the past 12 months.1
Of course, not all parts of the fixed income market are as liquid as government bonds, but fixed income markets are among the most highly traded markets in the world. There are, however, parts of the fixed income world that are less liquid and thus may suffer from inefficient pricing. This can present opportunities and challenges for investors.
Less liquidity, can have some advantages. Over the past five years, for example, less liquid parts of the bond market have generally experienced higher returns than more liquid bond market sectors.2