Bond investors lukewarm on call to delay data
A proposal to delay disclosure of large corporate bond purchases in order to improve market liquidity is getting push-back from some of the investors who could benefit most from the change.
An SEC subcommittee on Monday suggested that secondary high-grade sales over US$10m and high-yield sales over US$3m not be made public for 48 hours. The current lag is 15 minutes.
The Fixed Income Market Structure Advisory Committee, which includes large investors, borrowers and traders, proposed a one-year trial for the arrangement.
The thinking is that delayed disclosure would encourage more market-making by dealers, who tend to be wary of holding large positions.
The transactions targeted in the proposal only account for about 1%-3% of the total number of trades between 2013 and 2017, but represent a hefty 33%-41% of their total par value traded.
And many on the buyside believe any reduction in transparency is a bad idea.
“For the most part liquidity is a risk you need to manage around,” said Matt Brill, senior portfolio manager at Invesco. “You can’t just ask for opaqueness.”
John McClain, a high-yield portfolio manager at Diamond Hill Capital Management, suggested the proposed rule would not help everyone.
“People arguing for this change are trying to benefit their shareholders at the expense of the other market participants,” he said.
“It doesn’t solve any issue and it decreases transparency. It doesn’t make any sense to me.”
Dan Fuss, vice chairman of Loomis Sayles and manager of the firm’s bond fund, also expressed reservations.
“Loomis might benefit from it, but it’s not good for the markets,” he told reporters on Tuesday. “I like transparency.”
The National Association of Securities Dealers introduced the TRACE system that publishes bond trade data in 2002, saying it hoped to improve both transparency and liquidity.
Since then, however, liquidity has largely declined - partly because asset managers have got so much bigger and more homogeneous - while issuance has skyrocketed.
And if the market truly is close to the end of the credit cycle as so many expect, the huge asset managers may have difficulties unwinding their massive holdings.
The total amount of US corporate bonds outstanding has approximately doubled over the past 10 years, according to data from Sifma.
“The proposal is a natural consequence of an increasingly concentrated market,” said one senior head of credit research.
“Delaying disclosure is an attempt to suppress price volatility,” he said. “It addresses a symptom - not necessarily the cause.”
Chris White, chief executive of ViableMkts, said more transparency was needed before trades are executed - and has launched BondCliQ, which is expected to consolidate dealer quotes, to do that.
“The problem doesn’t start with reporting the trade, but with asset managers’ ability to find a dealer that can complete that trade,” he said.
“There is a problem with the search process of finding a counterparty, but the solution is not to take away the tape or to delay the tape.”
But others believe the virtually instant dissemination of trade data discourages risk-taking in the market.
Everyone watching TRACE knows what a buyer has paid, leading to a ripple effect in pricing - often to the detriment of the new bondholder.
“Delayed (disclosure) could give dealers more confidence to take on larger trades,” said one credit strategist who asked not to be named.
“Ironically, price disclosure required under TRACE has contributed to illiquidity for larger-sized secondary trades.”
Meanwhile some believe liquidity is not as bad as it as been.
“Over three-quarters of corporate bond investors (feel) it is easy or extremely easy to execute orders up to US$5m in size,” Greenwich Associates said in a report last month.
“This is a stark contrast to the sentiment only a year ago, where that same metric was barely one-third.”
And in its bi-annual monetary policy report in July 2017, the Federal Reserve said liquidity overall has been good since the crisis.
Whatever the case, the Financial Industry Regulatory Authority would still have to design the trial programme - and the SEC would have to approve it - meaning changes are not likely coming soon.
In the interim the market knows there is “no easy fix”, as Brill at Invesco puts it.
“You’re never going to be able to trade bonds like stocks. You’re always going to have to understand the nuances of individual bonds and the nuances of liquidity. There’s no magic pill.”