Lesson 5 of 5 · 13 min
Secondary markets, liquidity and distressed debt
Most bonds trade over the counter through dealers, liquidity varies enormously from bond to bond, and the bid-offer spread is the yardstick: tiny for new government bonds, wide for old or infrequent corporate issues.
In short
- Bond secondary markets are mostly quote-driven / over-the-counter (OTC), though electronic platforms are growing; listed equities trade mainly on exchanges.
- Main participants: institutional investors, financial intermediaries (dealers) and central banks.
- Bid-offer spread: the gap between the dealer's buying (bid) and selling (offer) price; the key liquidity measure, often quoted in basis points.
- Most liquid: on-the-run DM sovereigns (fractions of a bp). Then recent IG corporates from frequent issuers (a few bp). Least: seasoned or infrequent-issuer bonds (10–20 bp or more).
- Distressed debt trades well below par and keeps trading until liquidation or restructuring; a distressed issuer's shares have usually already been delisted.
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