Investors should be Aware of Bond Liquidity

Recently, the Financial Industry Regulatory Authority (FINRA) published an alert for investors relating to bond liquidity. For most individuals who have bonds as part of their portfolio of investments, the liquidity of those bonds is not usually an issue that is considered. But, understanding bond liquidity can be important, particularly in times of market volatility.

What is Bond Liquidity?

Liquidity relates to the ease or difficulty of selling an investment with minimal impact on the price. The easier it is to buy and sell an investment, the more liquid it is. The most liquid assets are considered to be similar to cash because their prices maintain relative price stability when sold on the market. Some of the ways liquidity can be decreased is where there is an imbalance between the number of buyers and sellers or price volatility.

Most investors do not think about the liquidity of bonds because bonds are typically bought and then held until they fully mature. If this is the case, the ease of selling the bond is not usually important. However, if an investor was interested in selling or buying a particular bond, it is important to realize that the bond market is not always instantly liquid. As a result of this, it may be difficult for that investor to complete the desired transaction.

FINRA issued the alert for investors to be aware for the possibility of decreased liquidity and investment losses when bonds are sold before maturity during period of market stress. Some of the factors that may impact bond liquidity include:

1. The breadth of the market: this relates to the large and diverse number of bonds that exist such as corporate, municipal, and treasury. Each one has different characteristics and risk factors.
2. Dealer Inventory: dealers may not be holding as many bonds as they were in the past, which decreases liquidity.
3. Selling Pressure: when multiple owners of the same type of bond all attempt to sell at the same time, liquidity decreases. This type of mass sale may be caused by market corrections, economic shocks, or interest rate increases.Many investors have been sold leveraged bond funds where money managers have utilized margin or leverage to buy more bonds to bolster returns. However, many bond funds have suffered dramatic drops in value when bond prices drop and assets must be sold at steep discounts to meet margin calls. Many Wall Street firms have created proprietary leveraged bond funds which are primarily sold to retail investors causing millions of dollars in damages. Ultimately, many investors were able to recover damages through securities arbitration claims against the firms which created and sold these products based on allegations that the brokerage firm either misrepresented the investments and/or failed to properly manage the investment.

About FINRA

FINRA Investor Alerts are intended to help educate investors about important and current investing issues. In addition to these alerts, FINRA also provides investors with an avenue to hold stockbrokers and the firms they work for to be held accountable for misconduct through arbitration and mediation.

Under FINRA arbitration, an arbitrator (or a panel of up to three arbitrators) hears both parties to a dispute and issues a binding ruling. The arbitrator or arbitrators are neutral third-parties. Through mediation, an independent, third-party helps to facilitate discussion between parties to a dispute, with the goal of negotiating an agreement to resolve the issue.

If you are an investor and believe that you have been harmed by stockbroker misconduct, speak with an experienced securities law attorney as soon as possible. At Silver Law Group, we have extensive experience with the processes for protecting investors provided by FINRA. We would be proud to represent you and look forward to hearing from you.