Journal of Economic Perspectives
ISSN 0895-3309 (Print) | ISSN 1944-7965 (Online)
US Corporate Bond Markets: Bigger and (Maybe) Better?
Journal of Economic Perspectives
vol. 39,
no. 2, Spring 2025
(pp. 215–34)
(Complimentary)
Abstract
The US corporate bond market has expanded significantly, fueled by electronic trading, institutional innovation, and growing retail participation via mutual and exchange-traded funds. These developments have improved efficiency by reducing costs and enhancing transparency, yet they have also introduced new vulnerabilities. The market's shift from relationship-based to transaction-based trading has weakened its ability to absorb stress, especially during periods of widespread selling. We examine the structural changes that have reduced dealer intermediation, the limited liquidity benefits of electronic platforms, and the destabilizing role of fund flows. The COVID-19 crisis exposed these weaknesses, prompting the Federal Reserve to act as a "market maker of last resort." We argue that while the market is "better" in many ways, enhancing resilience through transparency and long-term investor participation is essential for future stability.Citation
O'Hara, Maureen, and Xing (Alex) Zhou. 2025. "US Corporate Bond Markets: Bigger and (Maybe) Better?" Journal of Economic Perspectives 39 (2): 215–34. DOI: 10.1257/jep.20251439Additional Materials
JEL Classification
- G12 Asset Pricing; Trading Volume; Bond Interest Rates
- G23 Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors
- G41 Behavioral Finance: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets [Neurofinance]
- I12 Health Behavior