PT - JOURNAL ARTICLE AU - Karan Bhanot AU - Liang Guo TI - Negative Credit Spreads: <em>Liquidity and Limits to Arbitrage</em> AID - 10.3905/jfi.2011.21.1.032 DP - 2011 Jun 30 TA - The Journal of Fixed Income PG - 32--41 VI - 21 IP - 1 4099 - https://pm-research.com/content/21/1/32.short 4100 - https://pm-research.com/content/21/1/32.full AB - Recent reports in the financial press regarding negative spreads in the investment-grade corporate bond market have drawn the attention of policy makers and market participants alike. Using a sample of investment-grade corporate bond yields for the period 9/2009 to 9/2010, the authors examine all data points where the trade price reflects a negative spread. There are a total of 67 instances distributed among 10 companies where the credit spread is negative based on reported trade prices. The observed credit spread does not violate arbitrage restrictions once the bid–ask spread and liquidity are accounted for. In terms of default risk, CDS prices are higher than the bond yield spread on these days, but funding and asset-specific liquidity constraints possibly limit the ability to exploit the arbitrage.TOPICS: Fixed-income portfolio management, credit risk management, credit default swaps