Flight from liquidity and bond yields: evidence from Thai market

This study investigates how liquidity risk influences mutual fund selling behavior and bond pricing in the Thai bond market during periods of distress. Using quarterly mutual fund holdings from Morningstar and transaction-level data from the Thai Bond Market Association (ThaiBMA) between 2015 and 2024, the analysis examines whether mutual funds exhibit “Flight from Liquidity” behavior—selling their most liquid assets under stress—and how such behavior affects bond yield spreads.Three hypotheses are tested. First, whether mutual funds are more likely to sell government bonds than corporate bonds during distress periods. Second, whether funds exhibit flight-from-liquidity behavior within each bond segment by selling the more liquid bonds of the same issuer. Third, whether government bond liquidity affects the corporate–government yield spread, particularly whether the liquidity premium in government bonds declines during distress periods.The results show that mutual funds are significantly more likely to sell government bonds than corporate bonds during distress, indicating that government bonds serve as the main source of liquidity when funds need to rebalance their portfolios. Within each bond segment, both government and corporate bonds display clear flight-from-liquidity patterns, as more liquid bonds are more likely to be sold during distress. On the pricing side, the liquidity premium embedded in government bonds is positive in normal periods but diminishes during distress, leading to a narrowing of the corporate–government yield spread.Overall, the findings confirm that liquidity risk affects both selling behavior and pricing in the Thai bond market and provide new evidence on liquidity dynamics in emerging markets.