What Happens to Bond Liquidity When Some Bonds of the Issuer Mature?

Abstract

Bond portfolio managers constantly worry about the liquidity of their portfolio. Consider a bond portfolio manager holding bonds of a particular firm that has numerous maturities outstanding. Assume that some of the issuing firm’s bonds mature. Do the firm’s remaining bonds become more liquid or less liquid? The authors analyze the impact of the maturity of a firm’s bonds on the liquidity of the firm’s remaining bonds, where a reduction in the number of bonds outstanding suggests a potential reduction in liquidity. Alternatively, the leverage reduction due to the reduction in the number of bonds outstanding may improve the firm’s credit quality and result in greater liquidity. Their results strongly suggest the former where the strength of reduction depends on the ratio of the USD amount matured to total debt. The results have important implications for how to hedge the portfolio against interest changes.