Abstract
In this paper, we examine the development of liquidity in three major bond markets in Israel - nominal government, CPI-indexed government, and CPI-indexed corporate - from the onset of the global spread of the COVID-19 pandemic until the end of July 2020. We use common liquidity indicators, which examine the aspects of liquidity cost, market depth, and market activity. We find that in mid-March of 2020, bond markets experienced severe illiquidity, which was reflected in a significant increase in the liquidity cost. Despite the severe negative impact, the liquidity cost in these markets recovered more rapidly than following the 2008 crisis. At the end of the examined period, the liquidity level in the government bond market was relatively close to the precrisis level. We find that the lower the level of liquidity before the crisis, the larger the deterioration in liquidity across the various market segments, particularly in the corporate bond market. We examine the effect of the steps taken by the Bank of Israel during the COVID-19 crisis, and find that after the publication of the plan to purchase up to NIS 50 billion in bonds in the secondary market, and the simultaneous onset of plans by other parties, there was a significant improvement in the liquidity cost indicators. The initial steps taken before the publication were only partially effective.