Lifting the Veil From the Bond Market

Systems promoted by regulators to improve transparency—such as soon-to-be-implemented FINRA announcements of corporate debt pricing—also wipe out traders' profits.

This thing called transparency is spreading in the corporate-bond market, and it’s hurting traders’ bottom lines.

Credit traders are increasingly being forced to publish the prices at which they bought and sold securities. They’re reaping smaller profits as a result, so it’s no wonder they’re negative on new proposals requiring them to report details on an even broader swath of debt trades.

In the U.S., the Financial Industry Regulatory Authority (FINRA) will start disseminating prices on privately sold corporate debt at the end of this month. While the U.S. has required some public disclosure of corporate-bond prices since 2002, the European Parliament just approved a similar set of rules in April, which the European Securities & Markets Authority now has the task of defining.

About 46 percent of bigger institutions think it’ll become more difficult to trade European corporate bonds after the enactment of rules mandating price disclosures, while 41 percent think it’ll become easier, according to a MarketAxess Holdings Inc. study released yesterday.

Among larger European investors and dealers, “you see anxiety about too much information, too soon, in either large trade sizes or less-liquid bonds,” Rick McVey, chief executive officer of MarketAxess in New York, said in a telephone interview. At the same time, he said, “keeping the market opaque and closed has impeded the growth of the European bond market.”

 

Bond Markets Booming

Regulators around the world are trying to illuminate obscured markets as central banks rely on them more than ever as a means to implement economic stimulus.

The Federal Reserve has bought trillions of dollars of government bonds and mortgage securities since the credit crisis—purchases that are intended to boost economic growth by lowering borrowing costs for businesses and individuals. Companies have sold record amounts of debt in response, seeking to lock in low rates for years.

And European Central Bank (ECB) President Mario Draghi said last month that policy makers were “comfortable” taking measures to boost growth and inflation, including unconventional steps such as quantitative easing. Analysts expect him to unveil a new program as soon as tomorrow, when the ECB concludes a policy meeting.

For these reasons, credit markets are ballooning, making them ever more important to the global economy. The volume of European-company bonds has swelled 33 percent since the beginning of 2008, while the U.S. corporate bond market has grown about 60 percent in the period, to almost $10 trillion, according to ECB and Securities Industry & Financial Markets Association data.

Most of the biggest investors and dealers say that while the new rules may not be the answer, they want more information about bond trading in Europe. About 58 percent of them said there currently isn’t enough transparency, according to the MarketAxess survey.

In the U.S., regulators are increasingly scrutinizing corporate-debt markets, where trades still largely occur over the phone and through e-mails, as low interest rates prompt record numbers of investors to plow money into riskier bonds.

Meanwhile, the world’s biggest bond dealers have cut staff and inventories in response to lower trading profits and risk-curbing rules, meaning that they play less of a role facilitating exchanges. This has made it more important for investors to find alternative ways to buy and sell, and to glean accurate information on their own about what prices they can feasibly attain.

In the year after the Trace bond-price reporting system was introduced in the U.S., a study found that $1 billion in commissions were wiped out. More information has been beneficial, though, because it has given investors confidence in the value of their purchases.

Whether big bond firms like it or not, debt markets are dramatically transforming as they become more and more important to the world’s growth engine.

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