The widening imbalance between credit supply and demand has exacerbated liquidity challenges.
These challenges have the potential to impact fixed income strategies, particularly indexed portfolios, including higher transaction costs, difficulty tracking market changes, and increased exposure to difficult-to-trade securities.
Fixed income market making and secondary trading for dealers has been stifled by Dodd-Frank regulations and stiffer capital requirements. Post financial crisis, dealer inventory (supply) has decreased while corporate bond issuance and AUM have increased, reflecting increasing demand.
Trading volume also illustrates the reduction in liquidity.
Even as the average corporate debt outstanding grew by more than 125% between 2002 and 2013, average corporate debt traded daily fell by almost half (source: SIFMA, FlexShares). FlexShares Credit-Scored US Corporate Bond Index Fund (SKOR) is backed by an index that utilizes a distinctive investment universe, liquidity screens and other constraints to help manage these liquidity challenges. The index also features a fundamentals-based credit evaluation process that is forward-looking and focused on the metrics we believe matter in the fixed income space: management efficiency, profitability and solvency.
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