The liquidity of an issuer can influence the curve as even wider bid/ask spreads for certain issuers can impact the curve’s shape. If an issuer currently plans to refinance front end issues with longer maturities, the issuer’s credit curve will steepen given the increased supply, even if it is partially offset by narrower bid/ask spreads from improved liquidity.
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Consider that a company has a set of bonds that will mature next year and another set of bonds maturing after 30 years.
1st sentence: If the liquidity of the bonds is low, or the bid-ask spread is high, the credit spread will widen as the investors will demand an additional liquidity risk premium.
2nd sentence: If the company refinances the short-term bonds by issuing long term bonds, the short term rates fall as the company increases demand, increases the price, so short term rate falls. For the long term, there are 2 opposing effects-:
The first effect overpowers the second effect and so, the spread rises, steepening the yield curve.
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