Investors have been concerned about liquidity in the fixed income markets for years. Now, for the first time, public companies are able to see hard data on how well banks are supporting the buying and selling of their bonds in the secondary market, owing to a new data initiative from a Silicon Valley-backed technology firm.
That issue gained new urgency in March, when asset managers, including credit hedge funds, struggled to trade and get accurate prices to calculate net asset values of their portfolios. That’s because the structure of the bond market in 2020 is largely the same as it was decades ago, with little transparency in its inner workings. Bonds and other fixed income securities still trade over-the-counter, meaning a dealer and an investor directly negotiate a price, whether online or over the phone.
As a result, investors, dealers, and others have no central place to find bond prices and other crucial information on trading. One of the many impossible-to-find data sets has been comparative information on the quality of dealers’ actual market-making capabilities in a particular company or even sector, such as technology. Companies that want to issue debt have generally chosen underwriters based in part on past relationships or on industry league tables, which are essentially market share rankings of each bond underwriter that provide little information on secondary market support.
But now bond issuers can get comprehensive report cards on the dealers and data from BondCliQ, a centralized pricing system that aggregates pre-trade institutional quote data. BondCliQ made data available this month to corporate treasurers that are part of the NeuGroup, the largest corporate finance organization.
Liquidity in the bond markets matters to issuers: the more liquid their paper is in the secondary market, the lower the cost of their debt. Asset managers also want to replace the popularity contest that public companies use to help choose co-managers and book runners for their debt with objective data, saying investors ultimately lose billions when they can’t easily buy or sell securities or get accurate pricing information.
While the issue may sound arcane, the lack of hard data on dealers’ support of the bond issues they underwrite is one factor in the ongoing liquidity problems in fixed income. Even as equity markets have become largely electronic over the last 30 years, fixed income markets still lack basic transparency.
“Wouldn’t it be useful to have the ‘baseball card stats’ of banks before you choose one to underwrite your bond issue?” said Eric Ball, an adviser to the NeuGroup who oversaw the issuance of $52 billion in debt when he was Treasurer of Oracle for 11 years, in an interview with Institutional Investor.
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“The idea is to let the community of dealers compete for underwriting by demonstrating objectively that they support your deals in the secondary market,” said Chris White, founder and CEO of BondCliQ. Dealers benefit by being able to go after new business with objective statistics, he said.
“Competition for primary market mandates will lead to more consistent and reliable pricing information,” White added.
A portfolio manager at PIMCO, who declined to be named, said the lack of free flow of simple information in the bond markets still stuns him every day, particularly given the level of automation and transparency available in stocks or futures and options.
“Getting better information out there doesn’t require advanced physics. The dealers profit when people have less information,” he said. He said the BondCliQ solution is simple at its core — but he also expects that it will be quite a while before it will become clear whether or not it has made a difference.
White said that roping in issuers to help with liquidity isn’t a new idea. BlackRock years ago proposed that companies standardize their issuance of bonds. But that also takes away their flexibility to issue debt when they need it or to capitalize on rate changes. As a result, it never got any traction with issuers.
“This is a much more practical way to do it,” White said. “Standardizing issuance required too many concessions on the issuer side to fix a problem that isn’t their priority.”