I just read (but can’t figure out the reason) that when there are more new issues in the corporate bond primary market, the liquidity of the secondary market improves and bond prices and returns increase? Anyone has any ideas as to why this could be happening?
Thanks!
New issuances in the primary market serve as a confirmation for prices on the secondary market and hence people are willing to trade more given they have a better sense of the relative value of their investments.
When credit markets are well bid (spreads are tight) then companies have an incentive to issue paper because its cheap vs when the credit markets are out of fashion and its more expensive…the primary markets usually open in windows, especially in the high yield markets…not sure why the CFA puts it the other way around…
On-the-run securities have better liquidity and lower spreads