U.S. Corporate Bonds: Great Rates, Less Filling, or, Bubble, Bubble Toil and Trouble
Report Summary
U.S. Corporate Bonds: Great Rates, Less Filling, or, Bubble, Bubble Toil and Trouble
Aite Group says liquidity crunch for U.S. corporate bonds could open the doors to electronic trading, with 10% growth by volume projected this year.
Boston, May 1, 2013 – In a new report, Aite Group predicts that electronic trading in U.S. corporate bonds could grow from approximately 30% to around 40% of total market volume in 2013. Nevertheless, trading of U.S. corporate bonds will remain largely quote-driven.
New issuance of U.S. corporates in 2012 was up 34% from 2011 and 21% from 2007 to a record-high level, with the buy-side snapping new issuances up and getting filled in the primary market. This has meant that the buy-side has driven yields down with little room to drop further.
Sell-side capacity for principal trading has been greatly diminished. Despite an ongoing bull market in U.S. corporates, 2012 sell-side inventory was down 38% from 2011 and 78% from the 2007 highs to a near-record low, due primarily to regulatory pressure and resulting increased internal capital costs.
The prevalent dealer-to-consumer and voice-driven principal trading models are likely to become increasingly unsustainable for even moderate portfolio rebalancing or normal turnover in a continuing bull market, but new electronic institutional trading models will win through if the market turns bearish.
As sell-side inventory is low and bank capacity for principal trading diminished, a liquidity crunch is probable, due to either future unmet buy-side demand or a sell-off in U.S. corporates. This would allow electronic markets to potentially fill the gap in facilitating market volume. Therefore, banks—and at one point even a major buy-side institution—have created new electronic platforms to facilitate agency trading in U.S. corporates.
“While electronic volume has not kept up with overall demand, the mechanisms for electronic trading in U.S. corporates are mature and easily scalable should institutional participants find the will to further benefit from these electronic markets,” says David B. Weiss, senior analyst in institutional securities & investments at Aite Group.
This 37-page Impact Report contains 17 figures and five tables. Clients of Aite Group’s institutional securities & investments service can download the report.