Demand for liquidity skews bond markets

London

THERE are three things that matter in the bond market these days: liquidity, liquidity and liquidity.

How - or whether - investors can trade without having prices move against them has become a major worry as bonds globally tanked in the past few months. As a result, liquidity, or the lack of it, is skewing markets in new and surprising ways.

Spain, for instance, must pay more to borrow money than Italy for 30 years, even though Spain is considered safer by credit raters. Why? The Italian bond market is twice as big as the Spanish one - and, therefore, more liquid.

The same thing is happening around the world. Bonds in smaller, less-traded markets such as Finland, Singapore and Canada are starting to fall out of favour. And with the Federal Rese…