Was there a drop in liquidity in the corporate bond market during the Global Financial Crisis?
&quot;...if such a...cycle exists...&quot;---i.e. in economic language, whether liquidity and demand are endogenous to each other. Yes, of course they are. Liquidity (or illiquidity) of any asset can be viewed as an equilibrium outcome where agents confirm each other's beliefs---similar to the liquidity/illiquidity of a bank. As such it has a self-fulfilling aspect. An asset is liquid because people believe it is and therefore are willing to trade/make markets for it. This in turn leads to demand for the asset, which makes it liquid.
There are many instances during the 2007-2008 Financial Crisis that illustrate this. In the US, the Fed took positions to restore confidence in illiquid markets. The Fed eventually took no loss on those positions. Of course, the Fed also took similar actions to prevent/stop runs on financial institutions.
There are also similar examples during the current Covid-19 episode. In March 2020, liquidity of corporate bond market returned as soon as the Fed announced its corporate bond purchase program---long before it was actually implemented. When the program was eventually implemented (which the Fed must, to signal its credibility), only a small portion of planned purchase was made. Market's belief in liquidity was maintained as long as the Fed is believed to be credible. (See also here.)