AxessPoint: European government bonds bid/ask spread analysis

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Highlights

  • The bid/ask spread increases with maturity across all issuing countries. The average bid/ask spread is less than €0.01 for short bonds but more than €0.05 for long bonds.
  • Actively traded bonds typically have a tighter bid/ask spread. The average bid/ask spread is €0.012 for bonds with more than €80MM in average daily trading volume on TRAX; €0.02 for the rest.

Bid/ask spread by country and maturity

We calculate the bid/ask spread as the average of all bond-day Composite+™ bid/ask spreads as of 4pm London in December 2020 and January 2021. Bid/ask spreads are a good measure of trading costs and in the case of European Government bonds, they are strongly correlated with time to maturity and the issuing country.

Composite+ bid/ask vs years to maturity

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Time to maturity

 

Bonds with less than 5 years to maturity have bid/ask spreads tightly grouped around €0.008 across countries. With a AAA rating, Germany is seen as the safest issuer of EGB. It has the tightest average bid/ask spread after controlling for maturity.

Bid/ask spread by bond liquidity

Generally, more liquid bonds observe a tighter bid/ask spread. We use a measure of activity as a proxy for liquidity, where “More Active” bonds are defined as bonds with more than €80MM in average daily trading volume on TRAX. Bonds’ activity level is positively related to their issuance date and negatively related to their price; average time since issuance is 2 years for more active bonds and 7 years for less active bonds, while average price is €106 and €118 for more and less active bonds respectively.

Composite+ bid/ask vs maturity

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Maturity

 

Bonds with the same maturity and issuer may have a significantly different bid/ask spread. For example, the newly issued (January 2021) German bill (BUBILL 0.000 12/15/21) has a 0.003€ bid/ask spread, while a less active counterpart (BUBILL 0.000 11/21) issued in December 2020 hovers around 0.008€. Their bid/ask spreads are 0.005€ different, even though they are both German money market securities and trade around 100€.

Redefining real-time bond pricing

Composite+ is MarketAxess’ proprietary AI-powered pricing engine for corporate and government bonds. It produces an unbiased, two-sided market for more than 30,000 instruments globally. The engine generates nearly 30 million levels per day covering 90-95% of trading activity.

For questions or follow-up, email our data scientists at research@marketaxess.com.