Bond Markets Brace for Liquidity Test That Was Delayed in March
- Month-end index rebalancing, partially suspended, returns
- Duration to rise as 2 months’ worth of short coupons falls out
Photographer: John Taggart/Bloomberg
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The U.S. bond market faces a liquidity test at the end of every month. The March edition was effectively postponed because pandemic-fueled volatility left the market unprepared. Now, investors face the equivalent of an exam that covers twice as much material.
The test is the regular rebalancing of bond indexes on the last business day of the month to incorporate new securities issued during the period and remove those that no longer fit the index criteria. The rebalancings spur trading by fund managers who try to match -- or maintain a certain proximity to -- an index’s characteristics, but that can prove a challenge when markets are volatile.