Bank fund problems are stemming credit liquidity, says RBS

Funding pressures on European banks have led to a sharp reduction in liquidity for credit trading markets, according to research published by Royal Bank of Scotland last week (The Revolver: The Rising Price of Liquidity). Credit strategists Alberto Gallo and Phoenix Kalen point out that the spread premium for illiquid instruments is rising relative to that of liquid instruments - in the case of both cash bonds and credit default swaps. For example, the bid-offer spread on constituents of the iTraxx Main index has doubled compared to two months ago to 10 basis points. But at the same time, the bid-offer on the index itself has stayed stable at 1bp.