FINRA Investor Alert on Bond Liquidity

By: Jason Robinson, Summer 2015 Graduate Research Assistant

The Financial Industry Regulation Authority (FINRA) recently issued an Investor Alert entitled Bond Liquidity—Factors to Consider and Questions to Ask. A liquid investment is one that can be bought and sold easily without a significant change in the price of the asset. According to FINRA, investors should realize that the market for bonds, unlike the stock market, is not “instantly liquid, and some bonds are easier to trade than others.” It is important that bondholders consider the risks associated with selling a bond before it matures as well as the factors that put pressure on bond liquidity.

If a bondholder decides to sell a bond before maturity there is a chance that the price of the bond will suffer. Rising interest rates in the market, market turmoil and/or a massive selloff of bonds can all contribute to a reduction in bond prices. The bond market is very large and diverse, which can make it difficult to match buyers and sellers at desirable prices. Following the financial crisis dealers reduced their bond inventory, another factor that has hurt bond liquidity.

When it comes to purchasing a bond or analyzing one’s bond portfolio FINRA suggests that investors ask their broker or adviser the following questions:


  • How does your firm handle bond trades, particularly sell orders?
  • How often has this security traded in the recent past?
  • In what price range has the security traded during that time period?
  • Does your firm offer any fixed income analysis tools?
  • How can I construct my bond portfolio to better meet my liquidity needs?

FINRA also offers the TRACE Market Data Center, which is a tool that offers real-time and historical transaction prices for corporate and agency bonds, and end-of-day prices for U.S. Treasury Bonds. Lastly, it is important for bondholders to read and understand the information about their bonds that is detailed in the bond’s circular, information sheet, or official transcript. Click here to read the FINRA Investor Alert in its entirety.