Monday, March 4, 2013

Electronic Markets for Bonds?

I have written several posts over the past few months about my concerns about the lack of liquidity in the secondary market for bonds.

For example, here's an excerpt from my post on February 23, 2013:

As I have written on several occasions on Random Glenings, I believe investors are far too complacent in their belief in a liquid secondary market for bonds.

Most bond investors these days are not necessarily buying fixed income investments with the intention of holding their bonds until maturity.

Instead, bonds since 2007 have been viewed as low-yielding shelter against the global worries about economic growth and political discord.

However, implicit in most bond investors thinking is the idea that, "hey, if things start looking better, I might sell some or all of my bond holdings and move back into stocks".

But what if "the Great Rotation" from bonds to stocks occurs in a short period of time?  Who will buy the bonds that investors might want to sell?

Electronic trading has often been mentioned as a possible way to increase secondary bond market activity.

Regular reader Rich Sipley brought this article from the Financial Times to my attention today.

Titled "Electronic Trading is Not a Silver Bullet", the piece notes that while buying and selling bonds like stocks via computerized trading has intuitive appeal, there remains a number of barriers that may make it more difficult.

Here's an excerpt:

Working against the greater adoption of electronic trading is the fragmented and less liquid nature of coporate bonds, where each security has its own unique number, known as a Cusip.  Unlike equities, where an individual stock is common to all investors, each bond issued by a company is distinct, with different coupons and prices.  The lack of a generic bond works against a liquid market developing in this sector.

Still, I am encouraged to see that the bond community is looking ahead to try to avoid what could be a serious problem at some point in the future.