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Investor Composition and the Liquidity Component in the U.S. Corporate Bond Market

Jian Li & Haiyue Yu

The Journal of Finance2026https://doi.org/10.1111/jofi.70024article
FT50UTD24AJG 4*ABDC A*
Weight
0.50

Abstract

The link between corporate bond credit spreads and secondary market illiquidity in the cross section has grown stronger since 2005, resulting in a higher liquidity component in credit spreads. Using U.S. investor holdings data, we show that short‐term investors (e.g., mutual funds/exchange‐traded funds [ETFs]) increase trading activities in the secondary market, amplifying the effect of secondary market frictions on prices. We provide a model featuring heterogeneous investors with different trading needs and heterogeneous bonds to investigate the impact of the rapid‐growing mutual fund/ETF sector on the corporate bond market. We find the change in investor composition can quantitatively explain the aggregate trend.

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https://doi.org/https://doi.org/10.1111/jofi.70024

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@article{jian2026,
  title        = {{Investor Composition and the Liquidity Component in the U.S. Corporate Bond Market}},
  author       = {Jian Li & Haiyue Yu},
  journal      = {The Journal of Finance},
  year         = {2026},
  doi          = {https://doi.org/https://doi.org/10.1111/jofi.70024},
}

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F · citation impact0.50 × 0.4 = 0.20
M · momentum0.50 × 0.15 = 0.07
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R · text relevance †0.50 × 0.4 = 0.20

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