What job do you look for when you’re an unemployed Master of the Universe?
As trading in dollar-denominated bonds declined 22 percent in the past five years to an average daily $809 billion, so have the jobs, leaving even some of the most senior traders and salesmen moving from firm to firm. Dozens of journeymen are populating an industry that used to attract the young in throngs, lured by money and prestige, according to Michael Maloney, president of fixed-income recruiting firm Michael P. Maloney Inc.
“The business model is broken and 50 percent of the people in our world who are in trading are stuck right now,” Maloney said in an interview in his New York office.
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While the size of the U.S. bond market ballooned by more than $5 trillion since 2008 to $37.8 trillion at year-end, trading in the debt has slumped, according to data from the Securities Industry & Financial Markets Association. Average daily turnover fell to $809 billion last year from $1.04 trillion in 2008.That’s partly because banks have pulled back from making markets in bonds as higher capital requirements make it less profitable. The business — where buyers and sellers are primarily matched over the telephone or through e-mails — has also suffered shrinking margins because of regulator-mandated price transparency and the rise of electronic trading.
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Transaction costs declined after the Financial Industry Regulatory Authority introduced its bond-price reporting system, called Trace, in 2002. Wall Street bond traders lost about $1 billion in fees in the next year, or about $2,000 a trade, according to a study in the Journal of Financial Economics. The system is intended to provide transparency in an opaque market, and help prevent investors from being fleeced.
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The number of credit traders working for the firms plunged 30 percent to about 300 over the same period, even as companies issued record amounts of bonds in the U.S. to take advantage of historically low interest rates, according to Options Group and data compiled by Bloomberg.
The ‘broken’ corporate bond market was also discussed yesterday.
Now, never let it be thought that I consider secondary market trading to be an important thing in and of itself. Secondary market trading is important only insofar as it affects the issuance market, because the purpose of the corporate bond market is exactly the same as that of the equities market: to transfer money from sources of capital to sinks, to be returned (with luck!) as an income stream from the real-world investment that’s done with the money. And issuance in recent years has been monstrous in the past few years so, we might rashly conclude – no problem!
However, as has been pointed out by Ron Mendel of Hartford Investment Management in his admirable essay Private Placement Debt: Diversification, yield potential in a complementary IG asset:
Private placement investors require additional yield relative to comparable public bond issues, as lenders demand greater yield to compensate for increased liquidity risk as well as the underwriting and monitoring costs. This premium is variable over time and is a function of technical, supply and demand characteristics, credit fundamentals and insurance liability requirements. The typical liquidity premium historically ranges between 25 – 45 basis points.
That’s a hell of a spread, although not as much as we get in the Canadian preferred share market! It will also be noted that this is the rate in an environment comprised largely of insurance companies; other investment entities, including individuals, are probably going to want a bigger premium for giving up liquidity. Additionally, the ability to issue corporate debt has not yet been tested in an environment of increasing policy rates or general doom and gloom (after the extraordinary gloom and doom of the credit crunch, anyway).
A lack of secondary market liquidity will ultimately increase spreads at issuance and will therefore harm the economy, hurting workers; in addition, the economic harm will be mitigated to some extent by lower policy rates, hurting savers. This is just a mess all ’round.
On a brighter note, King Timmy is unconcerned about the inversion clampdown:
Scott Bonikowsky, a Tim Hortons spokesman, said the deal is “moving forward as planned” and is driven by long-term growth and not tax benefits. The actions to curb inversions announced yesterday by Treasury Secretary Jacob J. Lew are getting an immediate test as eight U.S. companies with pending deals decide whether to move forward.
It was a modestly negative day for the Canadian preferred share market, with PerpetualDiscounts down 13bp, FixedResets off 10bp and DeemedRetractibles flat. Volatility was low. Volume was slightly below average.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.9187 % | 2,662.0 |
| FixedFloater | 4.20 % | 3.46 % | 24,761 | 18.43 | 1 | -0.0442 % | 4,127.3 |
| Floater | 2.90 % | 3.02 % | 58,479 | 19.67 | 4 | 0.9187 % | 2,752.8 |
| OpRet | 4.05 % | 1.71 % | 98,734 | 0.08 | 1 | 0.0000 % | 2,727.1 |
| SplitShare | 4.29 % | 3.64 % | 108,735 | 3.90 | 5 | 0.2187 % | 3,157.6 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0000 % | 2,493.7 |
| Perpetual-Premium | 5.48 % | 2.49 % | 86,612 | 0.08 | 20 | 0.0670 % | 2,439.9 |
| Perpetual-Discount | 5.28 % | 5.17 % | 101,734 | 15.16 | 16 | -0.1271 % | 2,586.4 |
| FixedReset | 4.25 % | 3.80 % | 182,022 | 8.48 | 75 | -0.1004 % | 2,555.8 |
| Deemed-Retractible | 5.00 % | 2.00 % | 112,993 | 0.27 | 42 | -0.0010 % | 2,564.3 |
| FloatingReset | 2.58 % | -2.37 % | 81,385 | 0.08 | 6 | 0.0392 % | 2,538.5 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| CIU.PR.C | FixedReset | -1.67 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-09-23 Maturity Price : 20.55 Evaluated at bid price : 20.55 Bid-YTW : 3.80 % |
| BAM.PR.B | Floater | 1.58 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-09-23 Maturity Price : 17.35 Evaluated at bid price : 17.35 Bid-YTW : 3.02 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| ENB.PF.G | FixedReset | 489,453 | New issue settled today. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-09-23 Maturity Price : 23.10 Evaluated at bid price : 24.96 Bid-YTW : 4.28 % |
| SLF.PR.G | FixedReset | 155,672 | Nesbitt crossed 150,000 at 21.90. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.92 Bid-YTW : 4.70 % |
| FTS.PR.M | FixedReset | 116,552 | Recent new issue. YTW SCENARIO Maturity Type : Call Maturity Date : 2019-12-01 Maturity Price : 25.00 Evaluated at bid price : 25.17 Bid-YTW : 3.98 % |
| ENB.PF.E | FixedReset | 56,975 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-09-23 Maturity Price : 23.14 Evaluated at bid price : 25.06 Bid-YTW : 4.29 % |
| TD.PR.O | Deemed-Retractible | 56,112 | Scotia crossed 51,700 at 25.27. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-10-31 Maturity Price : 25.00 Evaluated at bid price : 25.27 Bid-YTW : 1.35 % |
| IFC.PR.C | FixedReset | 38,942 | RBC crossed 29,900 at 25.54. YTW SCENARIO Maturity Type : Call Maturity Date : 2016-09-30 Maturity Price : 25.00 Evaluated at bid price : 25.48 Bid-YTW : 3.19 % |
| There were 27 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| MFC.PR.F | FixedReset | Quote: 22.39 – 23.00 Spot Rate : 0.6100 Average : 0.4367 YTW SCENARIO |
| CIU.PR.C | FixedReset | Quote: 20.55 – 21.00 Spot Rate : 0.4500 Average : 0.3222 YTW SCENARIO |
| BAM.PR.G | FixedFloater | Quote: 22.60 – 23.00 Spot Rate : 0.4000 Average : 0.2927 YTW SCENARIO |
| PWF.PR.S | Perpetual-Discount | Quote: 23.90 – 24.09 Spot Rate : 0.1900 Average : 0.1314 YTW SCENARIO |
| PWF.PR.P | FixedReset | Quote: 23.00 – 23.24 Spot Rate : 0.2400 Average : 0.1885 YTW SCENARIO |
| POW.PR.B | Perpetual-Premium | Quote: 24.82 – 24.97 Spot Rate : 0.1500 Average : 0.1051 YTW SCENARIO |