Liquidity has a price, and setting that price beside the carry is what makes the size of it legible.
How much does liquidity cost compared with carry?
The Konark bond has a spread duration of 3.322261 and one year's spread carry of 1.9057% of price. In a normal market it quotes with a 15 basis point bid-ask, so a round trip costs 3.322261 x 0.15% = 0.498339% of price, which is 26.15% of a year's spread carry. In a stressed market the same bond quotes 60 basis points wide, and the round trip costs 1.993357% of price, or 104.60% of a year's spread carry. Buying and selling once during a bad quarter costs more than the entire year of compensation the position was held for.
Government markets show the same effect at a hundredth of the scale. Converting a quoted bid-ask into basis points of yield through the position's DV01, and then into the holding period an off-the-run concession has to survive, is the instruments-and-trading arithmetic and is taken as given here. On the ten-year Treasury used in Worked Example 7, whose DV01 is 0.07936320 points per 100 face, a half-thirty-second on-the-run quote is 0.196880 basis points of yield and a two-thirty-second off-the-run quote is 0.787519, so the extra round trip costs 0.590639 basis points of yield. The holding period is a different division and it comes off the price side, because the concession arrives as income rather than as a one-off yield give-up. The extra round trip is 0.046875 points of price, a 6 basis point concession is worth 0.06 points of price a year, and the breakeven holding period is therefore 0.78125 years, a little over nine months. Dividing the yield-converted cost by the yield concession instead shortens the answer by exactly the bond's modified duration, and that slip turns nine months into five weeks. The breakeven is linear in the extra quoted spread, so the same ten-year quoted four thirty-seconds wide off-the-run rather than two costs seven-thirds of this round trip and takes seven-thirds as long to repay it, which is 1.82291667 years and the figure the instruments-and-trading node reports against that quote.
What turns that conversion into a position is the horizon, not the bond. An off-the-run pickup is nearly free money for a buy-and-hold book and a losing trade for anything that turns over monthly. The same logic scales up: an illiquid credit is a good position for a fund with stable liabilities and a bad one for a fund facing redemptions, and the bond is identical in both cases.
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What are the practical consequences for a manager?
Three practical consequences. Size the liquid part of the book to the redemption profile rather than to the alpha opportunity. Quote every relative-value idea net of a realistic round trip, using the stressed bid-ask rather than the screen one. And treat the ability to sell as an asset with a price, because a manager who is forced to sell what they can rather than what they should has stopped running the strategy they wrote down.