A Handful of Giant Investors Have the Fate of the Bond Market in Their Hands – Business Insider
October 28, 2016 \
6 Comments
Full Article: Business Insider
The top five investment companies hold $264 billion in US high-yield bonds, according to a big report from Stephen Caprio and Matthew Mish at UBS. That’s equivalent to 20% of the market. The top 20 hold $605 billion, equivalent to 46%
Comments
The bond ownership distribution is already a significant problem now. Forgetting market conventions and norms, materially large funds will receive better pricing of trades – disadvantaging the smaller funds’ investors – provide market liquidity risk and hold sway over market development.
1. Better pricing leads us all to increased regulation and therefore ironically costs for all investors and greater barriers of entry.
2. Liquidity risk is a self-fulfilling black hole and merely a question of when.
3. Any market development changes will be in the oligopoly’s interests – a further detriment to market behavior.
1. We have regulatory pressures, increasing costs and decreasing revenues driving consolidation across the industry. 2. Most investors own credit products via mutual funds and an increasingly large number of ETFs. 3. Technology has driven down execution fees and opened the market to a broader audience (see #2). 4. The 24-hour news cycle coverage of the markets encourages investors to trade more often. 5. The role of Dealers to buy-when-everyone-is-selling-and-sell-when-everyone-is-buying has changed (see #1). 6. Rates are well below historical averages and more likely to go higher than lower. Summary. Liquidity events present risks and opportunities. Historically, the Dealers were… Read more »
Hi Wolfie,
I am not sure I agree with point #3 stating that execution fees have been driven down due to technology. MarketAxess is trading what, 80,, 85, 90% of corporate bond volume in N.A. and don’t think their fees have budged. And I am not aware of any of the existing ATS fees being reduced. I think maybe NYSE reduced fees but no one uses them anyways and Bloomberg didn’t reduce theirs because they don’t charge anything to begin with. I do agree that technology has led to certain entities participating more vigorously in the market.
M
I am continually hearing anecdotes of how the big funds are being allocated egregious shares of new issue deals which exacerbates this inequity. The market should now be considering the “too big to fail” theory as it relates to the buy-side it seems.
Agreed Slider. It was quite interesting how Blackrock enjoyed the asset growth banquet, but in 2014 began to voice their opinion on liquidity
The article makes already well know points. The question regarding the fate of the bond market is how these mutual funds actually manage their funds and if they are making appropriate changes to cushion themselves against an onslaught of potential redemptions. While carrying larger cash balances may be more prudent in terms of protecting their investors, there is negative incentive to do this as it materially reduces the return provided by the fund. While this is likely a positive in the long run, as usual, people are focused on the short term. Money managers need to get back to managing… Read more »