Bond Liquidity Made Simple: Sell Your Bonds Fast and Smart
Bonds are securities that are used by the government and corporations to raise debt from investors. Bonds provide investors with regular interest payments, and they are regularly traded on the exchanges.
Although bonds can potentially provide a regular and stable income, investors can face liquidity problems when selling the bonds. Here are some common liquidity issues that investors face in bonds secondary markets and how you can use Grip Invest’s platform to sell bonds with ease
The Liquidity Problem In Bonds
The corporate bonds in India witnessed a daily traded value of INR 21,560 crores on 19th March 20251. But there are possible corporate bond liquidity constraints which can make it challenging for retail investors to sell their bond holdings.
Why Selling Bonds Before Maturity Is Challenging?
Bonds are typically issued for long durations, with maturity periods reaching decades. Selling bonds before maturity can have liquidity challenges because:
1. Over-the-Counter Markets: Bonds are heavily traded through direct negotiation through over-the-counter markets and stock exchanges. This can lead to low transparency and the unavailability of buyers and sellers.
2. External Factors: Liquidity in bonds can be impacted by factors such as limited market depth, interest rate fluctuations, and credit rating changes.
3. Transaction Costs: The challenge of selling bonds before maturity can be exacerbated by higher transaction costs and bid-ask spreads.
For example, an investor investing in a corporate bond with 4 years left until maturity, can find it difficult to sell their holdings because of a lack of buyers for that bond. And the investor might have to settle for a lower price.
How Liquidity Affects Bond Prices And Returns
Liquidity refers to the availability of buyers and sellers for security. If there is low liquidity for a bond, then the seller might not find the buyer at their desired price and have to settle at a lower price.
Whereas in a highly liquid fixed income secondary market, the bonds can be traded near to their fair value. So, lacking liquidity can lead to settling for a discounted price and lowering your potential returns.
Factors That Impact Bond Liquidity
Here are some factors that impact the government and corporate bond liquidity:
1. Issuer: Bonds issued by the government are safer than bonds issued by corporations. Hence, government securities have higher numbers of traders.
2. Credit Rating: Bonds with higher credit ratings are preferred by investors as long-term investments. So, highly rated bonds have higher liquidity.
3. Interest Rate: When interest rates rise, bonds become attractive since they offer higher returns.
Why Selling Bonds Before Maturity Can Be Difficult?
There are several reasons that makes it difficult to sell bonds before their maturity in the bonds secondary market, such as:
A. Limited Buyers
Some bonds with lower credit ratings or with low interest rates might not have enough buyers as they can be very risky to hold as long-term investments. Some bonds that offer high returns and are stable, such as some government securities or high yield corporate bonds (junk bonds), can also have liquidity issues as investors might not be willing to sell bonds before maturity.
B. Price Volatility
Interest rates of bonds and the price of bonds are related inversely. It means when the interest rates increase, the price of bonds falls, and when interest rates fall, the price of bonds rises. This leads to a movement in the price of bonds. Other factors, like a change in the credit rating of the bond or a change in economic factors, can also lead to bond price movement.
A falling bond price can make sellers unwilling to sell at lower prices, thus draining the liquidity.
C. Hidden Costs
Intermediaries like brokers often charge high trading fees for bonds. This adds to the cost of trading the bonds for investors.
Bid-Ask spread can also add to the trading cost of the investors. Spread refers to the price mismatch between what buyers are willing to pay and what the sellers are willing to take.
For example, while selling corporate bonds, you might quote a price of INR 200, whereas the buyer quotes a price of INR 195, leading to a spread of INR 5.
Low liquidity can widen the spread and the costs for investors.
How Grip Invest’s Platform Provides Liquidity For Investors
Grip Invest offers investors the option to exit their bond investments early by placing a sell order after a 2-month holding period. This flexibility eliminates the need to wait until the bond is mature, providing a practical solution for those needing urgent access to funds.
Seamless Bond Selling: Instant Access to Buyers
Once a sell order is placed, the platform connects investors with multiple potential buyers. Grip helps bond sellers get good prices by lining up competitive offers. Everything is done online which makes selling very easy.
Transparent Pricing And Lower Transaction Costs
Grip Invest's selling experience is enhanced by transparent pricing and minimal transaction costs. Settlements are done within a single business day, ensuring a fast and efficient process. This helps in building investor confidence and gives investors greater control over their bond investments.
How To Sell Your Bonds Anytime On Grip Invest ?
With the Sell Bonds Anytime feature, exiting your bond investment is now faster and more convenient. Here is how it works:
Step 1: Select the Bond You Want To Sell
To sell your bond holdings, first log in to your Grip Invest account, and go to "My Investments," and select the bond you wish to liquidate or sell.
Step 2: Get An Instant Price Quote
Submit a sell order request and the platform will immediately match you with potential buyers and provide real-time pricing for your bonds.
Step 3: Complete The Sale
After you confirm the sell order, your broker will process the transaction for you, and the settlement will be done within one business day. The money received from the sale will then be credited to your registered bank account.
With this seamless process, Grip Invest provides a bond liquidity solution and gives you the flexibility to exit your bond investments whenever needed.
Who Benefits Most From Liquid Bonds?
A liquid bond market in India can be very beneficial in the following ways:
Retail Investors Seeking Flexibility
Individual investors who might have to sell their bond holdings unexpectedly before maturity or small investors who want to diversify in bonds can benefit from a liquid bond market. A liquid bond market can witness an inflow of funds from new retail investors who might otherwise have been reluctant to trade corporate bonds.
Short-Term Fixed-Income Investors
Liquid bonds are ideal for investors who are looking for short-term, low-risk investment options to park their surplus funds and earn steady returns.
Anyone Wanting To Sell Bonds Before Maturity Without Loss
Some unexpected changes in market or economic conditions can lead investors to exit bond investments before maturity. A liquid bond market can be beneficial in such a case. For example, an expected election result, sudden policy change, unexpected economic data, and geopolitical events are some events that can trigger bond selling.
Conclusion
Understanding what bonds market liquidity is necessary for investors. Liquidity issues in bonds secondary markets can affect investor returns and can discourage bond trading. Grip Invest’s Sell Bonds Anytime feature can help investors sell their bond holdings at the best prices possible before maturity. By doing this, it is now bridging the gap between buyers and sellers of bonds.
Start your Bond Investment journey with Securitised Debt Instruments (SDIs) products like LoanX and InvoiceX by logging in to Grip Invest today!
Frequently Asked Questions on Bond Liquidity
1. What is the difference between the primary and secondary bond market?
Primary bond markets are markets for freshly issued bonds which are issued by the government or companies, and investors are allotted these bonds directly from the issuer. Bond secondary markets are where bonds are traded among bond traders, and prices are dependent on supply and demand.
2. How do I sell bonds before maturity?
Bonds can be sold before maturity on the secondary market through brokers, financial institutions, and online platforms like Grip Invest. The price will depend on several factors, including changes in interest rates, the issuer's creditworthiness, and overall market demand.
3. How does liquidity impact bond prices?
Bond liquidity refers to how easily a bond can be sold without affecting its price. Highly liquid bonds, such as government securities or highly rated corporate bonds, are easier to sell and tend to have better pricing and smaller bid-ask spreads due to their attractiveness to buyers. On the other hand, illiquid bonds may require sellers to lower their prices to attract buyers, potentially resulting in trading at a discount.
References
1. National Stock Exchange India, accessed from: https://www.nseindia.com/report-detail/cbm-trades-archives
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