The difficulties that traders are having maneuvering in the $10trillion U.S. corporate-bond market may be poised to get worse.

It's been a struggle for investors to be nimble in creditmarkets given Wall Street's pullback since the financial crisis.Trading has failed to keep pace with record corporate borrowing,with daily turnover falling to an average 0.2 percent of corporatedebt outstanding, from 0.3 percent five years ago, according todata compiled by the Securities Industry and Financial MarketsAssociation.

Liquidity will probably deteriorate further leading up to July,when the U.S. Dodd-Frank Act's Volcker Rule goes into effect, according to Barclays Plcstrategists. The regulation seeks to curtail banks' trading withtheir own money.

“Liquidity in U.S. investment-grade credit has continued todecline post-crisis,” Barclays analysts led by Jeff Meli andBradley Rogoff wrote in a note today. New regulations “haveeffectively lowered banks' risk appetite and ability to holdsignificant corporate-bond inventory.”

The Volcker provision has already prompted banks to cut theircredit holdings to about the lowest ever as a proportion ofoutstanding debt.

The 22 primary dealers that do business with the Federal Reservehave kept their inventories more or less the same since April 2013,when the central bank changed how it reported the data, while themarket has grown more than 13 percent, according to the Barclaysreport.

The firms held a net $16.1 billion of high-yield andinvestment-grade bonds as of Sept 3, down from $20 billion asrecently as July 30, Fed data show.

The retrenchment matters as much as ever to investors who'vebeen plowing into less-liquid securities, searching for higheryields in a sixth year of record Fed stimulus.

So, what should investors do about it? For investment-gradebonds, it makes sense to move into more-frequently tradedsecurities, according to the Barclays analysts. This is because theless-active ones aren't paying enough of a premium to compensatefor the likelihood that banks will be even more reluctant to tradethem in coming months.

“Volcker requires banks to limit inventory to meet reasonablyexpected near-term demand,” Shobhit Gupta, a credit strategist atBarclays, said in an e-mail. “For illiquid bonds, it will furtherlower liquidity.”

It may only get harder to trade those bonds in a pinch.

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