The document discusses liquidity issues in the US corporate bond market, noting significant growth in both investment grade and high yield markets over the past five years. Despite this growth, liquidity has become more challenging due to reduced market-making capacity of investment banks resulting from enhanced banking regulations. As a consequence, bond investors can expect increased pricing volatility, higher expenses, and longer transaction times.

1. The fixed income
Frus-trading
Evan Moskovit
Lead Portfolio Manager Global Investment Grade
and US Investment Grade Credit

2. Liquidity remains a hot topic in the fixed income markets, specifically in the corporate bond market. One can
define liquidity in many different ways, but in this case it is the ability to either buy or sell a security at a
reasonable price over a reasonable time. And for the sake of clarity, we will focus on the US corporate bond
market, arguably the most liquid and transparent in the world. The US high yield (HY) market and the US
investment grade (IG) market have each experienced significant growth over the last five years. According to
Barclays, the IG market has grown by 111% to more than $5.4 trillion while the HY market has expanded by
almost 70% to $1.2 trillion. With such exponential growth, one would assume that liquidity is ample.
The liquidity discussion is however focused on the secondary market
of corporate securities as opposed to the new issue market where
companies, through investment banks, sell securities to investors. As
the name suggests, secondary trading occurs post new issue. On the
IG side, turnover, or the percentage of traded relative to total out-
standing securities has been in the 65-70% range since 2008. 2009
saw a jump in turnover to 90%. HY turnover has fallen to 100% from
110% in 2010. While the absolute volume of bonds trading thus has
increased, the ability and cost to transact has become more
challenging. For both the IG and HY markets, achieving liquidity for
securities that do not benefit from the attributes that are most in
demand (including recent vintage, certain covenants and structural
features, issue size, coupon, etc.) could result in bouts of illiquidity and
increased trading expense.
The main problem lies in the liquidity provided by the large investment
banks, however. These have long been corporate bond liquidity
providers; allowing for both the purchase and sale of securities with
relative ease, given their large balance sheets and access to cheap
financing. The adoption of enhanced banking regulations – including
Dodd-Frank, which is designed to protect the financial markets – has
resulted in a significant increase in these firms’ cost of capital. This has
substantially affected their market making activities. Dealer
“inventories” have plummeted, reducing the ease at which
transactions previously occurred. According to Deutsche Bank, IG and
HY bond inventories are down by 80% since 2007, despite the
meteoric growth of outstanding corporate bonds. Without the use of
dealer’s balance sheets, buyers and sellers must utilize brokers and
many new electronic platforms to find either a buyer or seller of a
particular security.
Given this “new world” of fixed income trading, bond investors should
expect to experience greater pricing volatility, elevated expenses,
extended execution periods and greater levels of frustration.
Evan Moskovit
Lead Portfolio Manager Global
Investment Grade and US
Investment Grade Credit

3. About NN Investment Partners
NN Investment Partners is the asset manager of NN Group N.V., a publicly traded corporation. NN
Investment Partners is head-quartered in The Hague, The Netherlands. NN Investment Partners
manages in aggregate approximately EUR 180 bln* (USD 202 bln*) in assets for institutions and
individual investors worldwide. NN Investment Partners employs over 1,200 staff and is active in 16
countries across Europe, Middle East, Asia and U.S.
As of April 07, ING Investment Management has renamed to NN Investment Partners. NN
Investment Partners is part of NN Group N.V., a publicly traded corporation. Currently NN Group is
16.2% owned by ING Group. ING intends to divest the remaining stake in NN Group before 31
December 2016, in line with the timeline ING has agreed with the European Commission.”
*Figures as of 30 September 2015
Disclaimer
The elements contained in this document have been prepared solely for the purpose of information and do not constitute
an offer, in particular a prospectus or any invitation to treat, buy or sell any security or to participate in any trading strategy.
While particular attention has been paid to the contents of this document, no guarantee, warranty or representation, express
or implied, is given to the accuracy, correctness or completeness thereof. Any information given in this document may be
subject to change or update without notice. Neither NN Investment Partners B.V., NN Investment Partners Holdings N.V. nor
any other company or unit belonging to the NN Group, nor any of its officers, directors or employees can be held directly or
indirectly liable or responsible with respect to the information and/or recommendations of any kind expressed herein. The in-
formation contained in this document cannot be understood as provision of investment services. If you wish to obtain invest-
ment services please contact our office for advice. Use of the information contained in this document is solely at your risk.
Investment sustains risk. Please note that the value of your investment may rise or fall and also that past performance is not
indicative of future results and shall in no event be deemed as such. This document is not intended and may not be used to
solicit sales of investments or subscription of securities in countries where this is prohibited by the relevant authorities or leg-
islation. Any claims arising out of or in connection with the terms and conditions of this disclaimer are governed by Dutch law.