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To examine how FCF’s closure affected broader market liquidity, we compute several well-known liquidity measures for each bond with a time-to-maturity of less than ten years in the Trade Reporting and Compliance Engine (TRACE) database.We then sort bonds into quintiles of performance on December 11, as measured by their return relative to their average price the previous day, so as to examine bonds grouped by their price sensitivity to news about Third Avenue.Thus, even a week before FCF’s announced liquidation, the low quintile was trading at a steep discount compared with the other groups.Perhaps unsurprisingly, the bonds in the low- and high-return quintiles for December 11 had higher price impact measures prior to the event and on December 11.Rising credit spreads, increased costs for default insurance, declining commodity prices, uncertainty about global demand, and a possible change in the Federal Reserve’s monetary policy stance were all common themes affecting markets at the time.
The announced liquidation of Third Avenue’s high-yield Focused Credit Fund (FCF) on December 9, 2015, drew widespread attention and reportedly sent ripples through asset markets.
This is consistent with the observation that the bonds with the largest price reactions to news about Third Avenue were already less liquid.
On the event day, bid-ask spreads and round-trip costs increased most for these two return groups, suggesting liquidity strains in both groups.
If fund managers have these motives in aggregate, the market can become temporarily one-sided, leading to shortages of safe and liquid bonds and hence strains on market liquidity more broadly.
Second, FCF’s liquidation occurred against a backdrop of heightened uncertainty in corporate bond markets.