IU: What about less-liquid parts of the market, such as high-yield bonds?

Tucker: The story is very similar to investment-grade markets. We've seen a definite reduction in liquidity and transactions. In these markets, however, the price-discovery impact actually increases. In less-liquid markets, there is actually less information about where the underlying securities are trading for all market participants. So bid/ask spreads for an ETF such as the iShares iBoxx $ High Yield Corporate Bond Index Fund (AMEX: HYG) have widened. But they've been in line with the rest of the market.

In June, the average bid/ask spread for HYG was 18 basis points (.18%); today it's averaging around 35 basis points. Under normal conditions, the average bid/ask spread now for individual high-yield bonds is around 100 basis points. That has gone up to 200 basis points or more, depending on the specific issue you're trading. So even though we've seen a widening bid/ask spread for HYG, it's still less than the spread an investor would typically pay for trading high-yield bonds in a more-normal market.

IU: Are spreads an issue in Treasuries now?

Tucker: The 30-year Treasury bond typically trades around 3 basis points in terms of bid/ask spreads. It's now trading around 6 basis points. That's what institutional participants would typically be paying to buy those individual securities. 

By the same token, we can look at the iShares Lehman 20+ Year Treasury Bond Index Fund (NYSEArca: TLT). The ETF's bid/ask spread in June was trading at 1.2 basis points, or 0.012%. Today, it's trading at a spread of about 5 basis points. So even within the Treasury market, we've seen a widening in spreads. And that's being reflected in iShares fixed-income portfolios.

IU: How are international bond markets holding up?

Tucker: The emerging markets have also been severely impacted by the credit crunch and flight to quality. We have an emerging markets bond fund, the iShares JPMorgan USD Emerging Markets Bond Index Fund (NYSEArca: EMB). We've seen a widening of spreads in that fund. But it has been in line with the overall market. In June, EMB had a bid/offer spread of 20 basis points; now it's around 50 basis points.

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