Measuring market liquidity in US fixed income markets: A new synthetic indicator

We propose a new synthetic liquidity indicator that summarizes the information of a broad set of market liquidity measures for both sovereign and corporate fixed income markets in the US. Our index is based on seventeen liquidity measures that cover the main dimensions of market liquidity. The methodology to compute the index consists of two steps. First, we carry out a transformation of the individual liquidity measures based on that of Holló et al. (2012) for the CISS—Composite Indicator of Systemic Stress—and second, we weight the transformed variables using a principal component analysis. The indicator shows that liquidity in US fixed income markets has been impaired after the global financial crisis mainly as a result of weaker liquidity conditions in US Treasury markets, whereas those in the corporate debt market remained stable.