There is an increase in secondary market trading based on cash flow reinvestment when:
the primary supply is short or the composition of the primary market is not compatible with portfolio objectives.
Question: why is the short supply in primary market drives up the trading in the secondary market? At first I thought the primary market and secondary market always go into the same direction.
Thank you!
Hey dududu, So imagine you’re a fixed income portfolio manager and you just had one of your big holdings, lets say a $500 Mil bond come to maturity, i.e. now it’s in cash and it has officially matured, so you just received your last coupon payment and your massive face value at maturity. Well now you want to reinvest this bad boy. But wait… no corporations are issuing any fresh bonds in the primary market to finance their operations! (this can happen due to a multitude of economic/business cycle reasons) well darn… so primary supply is short and there is no issuance… what in the world are we going to do… I guess we could just sit on cash… but that would cause substantial cash drag and who knows when the primary market is going to come back online… well one option would be to look to buy bonds from someone else in the secondary market ( which would therefore increase trading in the secondary market ). So we got rid of our reinvestment problem
Thank you for the detailed response, Onward! Clear now!
Awesome! glad it makes sense now 