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  • May 30, 2017
    Fixed Income
    Michael Vaughan
    Since 2008, many investors have watched nervously as liquidity in the secondary credit markets seemingly drained away. In fact, liquidity has pooled in certain parts of the market, enabling healthy trading volumes in these sectors. Most market participants would be well aware of the factors contributing to this development, which include: •Immense growth in the size of the market (particularly in the US). For example, the high-yield (HY) market expanded from $571.3bn to $2.1tn in the seven years to the end of March this year; •Dominance of large issuers with more multi-layered capital structures; •Dwindling dealer inventories, as banks are forced to reduce balancesheet risk in order to comply with capital-adequacy regulations; and, •Vulnerability to redemptions by retail investors, particularly in a lowreturn environment