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Secondary markets for sovereign bonds are illiquid because of trad-
ing frictions. I build a framework with endogenous illiquidity to
study its implications on credit spreads and default risk. The model
integrates directed search in secondary markets into a sovereign de-
fault model. With trading frictions, secondary market demand and
supply flows are important drivers of bond prices, while they are
irrelevant in standard sovereign default models. I find that small
trading frictions can significantly tighten a government's financial
constraint and that policy interventions that reduce the sell flows
in the secondary markets can partially revert the effect of trading
frictions.
