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Alternatives for illiquid bonds


Discussion in Treasury Notes and Bonds

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bondsurya401
Chennai
 
Posts: 1 since Jun 2016
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If as a trader I select a bond which is illiquid and therefore I don't get a favorable price then how do I go for next best alternatives? Let's say I want to create a model which gives me the 3 best alternatives for a bond I choose then how should I design my model? I am thinking that my model should work as follows:
1. If my initial selection is a investment grade corporate bond with X% YTM and N yrs duration then my closest alternatives would be another investment grade corporate bond with x%(+/- a certain tolerance level) YTM and N yrs (+/- a certain tolerance level) duration. What can be an acceptable tolerance in this case? If there are many bonds satisfying this criteria then I would filter them based on highest liquidity (lowest bid ask spread).
2. For Gov securities such as T Bills my alternatives shall be another T Bill with maturity close to the selected bond and yield in an acceptable range.
3. For zero coupon bonds my alternatives shall be zero coupon bonds only which fall close to same maturity and yield.
4. For callable bonds my alternatives should be callable bonds only with matching call dates and yield.
Since, I am new to this area I have noted the above points based on my theoritical knowledge. Can the experts guide me in real life how the alternatives are chosen in case a bond can't be traded because its illiquid? Are the above scenarios and way to finding alternatives accurate or am I missing something?
Thanks in advance!


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