The average daily volume of bonds changing hands last year accounted for 0.29 percent of outstanding debt, the lowest proportion since at least 2005, according to data compiled by Bloomberg and Trace.
The 21 primary dealers with the Federal Reserve, which traditionally used their own money to facilitate trading, have reduced their corporate-bond inventories 76 percent since October 2007 to $57.49 billion, Bloomberg data show.
‘A Corset’
The rally in U.S. investment-grade debt may be waning with the securities losing 0.125 percent this month through Jan. 8, the third consecutive month of declines for the longest stretch since 2008, Bank of America Merrill Lynch index data show. The debt gained 55.6 percent in the four years ended Dec. 31.
Spreads on the bonds have tightened 8 basis points this month to 145 basis points, matching a three-year low, even as U.S. government debt, a common corporate-bond benchmark, has lost 0.6 percent.
Corporate-bond spreads are “so thin that they must be using a corset -- or the Fed,” Pimco’s Gross, manager of the world’s biggest bond fund, said in a message posted on Twitter. “Don’t buy them.”
Strategists at firms from Goldman Sachs Group Inc. to Bank of America Corp. forecast slowing returns, with each predicting a 1.6 percent gain in U.S. investment-grade notes this year, according to reports from the lenders. That compares with average annual returns of 11.6 percent since 2008, Bank of America Merrill Lynch index data show.
Deteriorating liquidity “hasn’t been noticed as much because the demand for corporate bonds has been kind of muting it,” said Mirko Mikelic, a money manager at Fifth Third Asset Management in Grand Rapids, Michigan, in a telephone interview. “Once people start dumping bonds, then you’ll start noticing it.”