An Overview of the Liquidity of the South African Vanilla Debt Market

Abstract

The issue of illiquidity is well known in the South African exchange traded debt market. Lack of trade leads to out-of-date data and stale market prices, which in turn implies unrealiable and dated credit spreads. The problem is heightened by the fact that the derivatives market (such as swaps and FRAs) are OTC based and are traded directly with a bank or prime broker. In addition, the coverage of credit ratings across the South African debt market is poor. This paper illustrates the extent of the illiquidity in the South African debt market (focussing on vanilla bonds) and the adverse effect this lack of trade has on credit spreads. It is the introductory section of a PhD thesis, motivating the need for alternative modelling of credit spreads, which the subsequent chapters of the PhD aim to address.