The last couple of years produced a bumper crop of new corporate bonds as companies raced to market to take advantage of the low interest rates. Amid the heavy new issuance, though, trading of corporate bonds in the secondary market has been declining, a victim of those same low rates and constraints on dealers’ capital.
The state of secondary market liquidity could exacerbate bond market sell-offs as interest rates rise. That might seem to be more of a concern for dealers and investors than for the companies that issue bonds. After all, demand for new corporate bonds remains strong, and getting its debt sold is a company’s main concern.
The BlackRock report argued that secondary market liquidity has suffered because there are so many different corporate bonds. It noted that Citigroup has 1,965 different bonds outstanding; Bank of America has 1,544; and General Electric has 1,014. BlackRock suggested that companies issue bonds on a regular schedule, as the U.S. Treasury does, perhaps using maturity dates that match those of centrally cleared swaps, and that they reopen bonds at regular intervals to create larger, more liquid issues.
David Pritchard, a principal at Aequitas Advisors, a capital markets advisory firm, questioned whether standardizing issuance would alter the pattern of declining trading volume as bond issues age.