Quantitative Portfolio Strategy

Analytics
8 January 2019
Liquidity Cost Scores (LCS®) Vadim Konstantinovsky, CFA

Barclays Bond-Level Quantitative +1 212 526 8290

[email protected]

Liquidity Metric Market Coverage

BCI, US

~20,000 bonds USD45trn outstanding

Overview Index Data from
• LCS is an objective, quantitative bond-level liquidity metric. It is expressed as a percent of
USD Credit IG* Jan-07
the bond’s price and measures the cost of an immediate, institutional-size, round-trip
USD Credit HY* Jan-07
transaction
USD Credit IG 144A Jan-07
• LCS relies on simultaneous bid-ask quotes issued by Barclays traders
USD Treasuries Nov-09
• LCS is computed at the end of each month, incorporating market data over the course of
USD TIPS Jul-10
the month
USD Fixed Rate MBS Mar-10
• For bonds not quoted in a particular month, LCS is computed by an asset class-specific
USD Emerging Markets* Feb-12
econometric model calibrated to the available quotes
• Daily LCS are available for liquid, trader-quoted sets of the USD IG and HY credit, EUR IG Pan Euro Credit IG* May-10
and HY credit, and USD EM bonds Pan Euro Credit HY* May-10
Pan Euro Credit FRN May-10
Applications GBP Corp 100-200mn May-10
• Portfolio/benchmark liquidity monitoring and reporting
Pan Euro Agencies May-10
• Liquidity-constrained portfolio/benchmark construction and optimization Pan Euro Treasuries Feb-11
• Quantifying the impact of transaction costs on alpha strategies Pan Euro Infl Linkers Mar-11
• Spread (OAS) decomposition into the risk premium, default, and liquidity components Global Covered Bonds Sep-12
• QPS publications are available on these and other liquidity-related topics Asia Pacific Treasuries Sep-13
*Daily LCS available

Historical Patterns of Market Liquidity Monitoring Daily Liquidity Dynamics

Daily LCS, USD IG Corporates
7.0 0.65
USD IG Credit 10-Nov
6.0 USD HY
0.60 October, 2016 November, 2016
5.0 Euro IG Credit
LCS, %

4.0 Euro HY 0.55

LCS, %

3.0
0.50
2.0
1.0 0.45
8-Nov (Election Day)
0.0 0.40
2007 2009 2011 2013 2015 2017 3-Oct 17-Oct 31-Oct 14-Nov 28-Nov
Source: Barclays Research Source: Barclays Research

Comparative Cross-Sectional Analysis Insights into Drivers of Bonds’ Liquidity

LCS Frequency Distribution USD IG Credit LCS, %
100% Age, yr
USD IG Credit
80% USD HY
Issue size, $mn <1 1-5 5-7.5 7.5+
% of Index Bonds

EUR IG Credit <300 1.15 1.20 1.12 1.41

60%
GBP IG Credit 300-500 0.87 1.03 1.09 1.23
40% 500-750 0.63 0.85 0.91 1.09
20% 750-1,500 0.39 0.58 0.77 0.97
0% 1,500-2,000 0.33 0.43 0.56 0.76
0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5 9.5 More 2,000-3,000 0.36 0.43 0.56 0.74
LCS, % >3,000 0.30 0.35 0.38 0.52
Source: Barclays Research Source: Barclays Research
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