Bond LIquidity And Yields

Many observers believe that the Federal Reserve may increase interest rates in December. According to a recent article, that could be the worst time for the bond market. During December, bond trading slows dramatically as banks clean up balance sheets in preparation for year-end stress tests. As a result, banks are less likely to enter into large trades. Strategists at RBC Capital Markets argue that the large jump in yields on bonds in late September was due to the lack of liquidity in the bond market because of banks preparing for quarterly reporting. If this is true, an increase in interest rates by the Federal may result in larger increases in bond yields than might be expected due to lack of liquidity, at least temporarily.