CFA Level I · CFA Level I Exam · Fixed-Income Issuance and Trading
Government bonds of major sovereign issuers generally trade with tighter bid-ask spreads than corporate bonds. The most likely reason is that sovereign bonds have:
Sovereign bonds typically have larger issue sizes and more active trading, which makes them more liquid. Dealers face less inventory and search risk, so they quote narrower bid-ask spreads. Maturity and coupon level are not the main drivers of this liquidity advantage.
- Alarger outstanding issue sizes and more active tradingCorrect
- Bshorter maturities that remove all interest rate risk
- Clower coupon rates that reduce dealer holding costs
Explanation
Large, frequently traded benchmark issues are more liquid, so dealers face less inventory and search risk and quote narrower spreads. Sovereign bonds are not always short maturity, and coupon level is not the main driver of liquidity.
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