Legend: Bid-ask spread (in basis points of face value)
against remaining time to maturity (in days) for Italian treasury bills ("Buoni
Ordinari del Tesoro"). The dashed line is the fitted bid-ask spread from a
simple regression. The size of the coefficient in the regression implies that
an extra 10 days of maturity imply an extra 4.4 basis points of bid-ask spread.
Data: Borsa Italiana, retrieved on September 5, 2016.
Why would it be cheaper to trade debt with a shorter remaining time to maturity? One explanation goes as follows: For an investor who is considering selling a bond, the closer the bond is to maturity, the more attractive is the option to refrain from trade and simply wait for repayment at maturity. Market makers in over-the-counter markets or liquidity providers in electronic limit order book markets both know this, and hence need to set higher bid prices the closer the bond is to maturity.
This has implications for the issuers: Since investors want to be compensated for the transaction costs, issuers can borrow at a lower cost when issuing debt with shorter maturities.