There's ample reason for concern that "broken" bond markets are currently the norm. The
Virtually all these markets are seriously illiquid but for Treasuries where the Federal Reserve has been at least on occasion buying back half of what it sells, and Money Markets, which trade with rare but significant risk to potentially "breaking the buck," like the Lehman Brothers collapse in 2008.
For insurers, addressing moribund fixed income bond markets matters if they are to manage portfolio returns and to maintain market function in their own market sector.
As a whole, the insurance industry holds $3.7T in bonds and asset backed securities across fraternal, health, life, property/casualty and title insurance sectors.
Life insurers are carrying approximately 75% of corporate bond risk exposure with $1.5T of $2T corporate bond holdings industry wide. As the Federal Reserve raises interest rates as they step back from quantitative easing, corporate bond holdings may fall in price and value. As long as mortality assumptions hold, e.g., ebola is contained, life insurers should be able to appropriately match assets and liabilities. If mortality assumptions change, e.g., pandemic risk spreads, then life insurers might conceivably be faced with sale of corporate bonds into a depressed market. A key issue for life insurers is to meet contractual obligations to policyholders.
The moment seems as fragile as it may be dicey. In the event of significant market corrections, investors could cash out
Coping measures are emerging as bond markets increasingly fail to clear risks efficiently. Insurance industry investment in real estate debt and infrastructure assets, among other private market assets, is projected to grow over the next few years to counter, in large part, fixed income market illiquidity. Loss of market function represents a systemic risk to the entire heavily-invested-in-debt-instruments, regulation-bound sector.
In September, industry leader Blackrock published a white paper contending that bond markets are "
Blackrock Vice Chairman Barbara Novick emerges as an asset management Rachel Carson drawing attention to corporate bond markets in the context of
Amid these developments,
a.) "all to all" markets, modifying the incumbent dealer model,
b.) multiple electronic trading protocols, moving beyond request for quote or central limit order book standards,
c) standardization of newly issued corporate bond features, and
d.) new participant behavior.
Separately,
She is tasking
"[In] the fixed income markets, technology is being leveraged simply to make the old, decentralized method of trading more efficient for market intermediaries, and its potential to achieve more widespread benefits for investors, including the broad availability of pre-trade pricing information, lower search costs, and greater price competition - especially for retail investors - is not being realized," worries White.
How can we possibly solve this level of market dysfunction?
Interactive Finance: 21st Century Solution
At the outset, let's be clear that
a.) technological innovation can and will yield efficiencies and generate investor welfare in corporate and municipal bonds as well as asset-backed (residential-mortgage backed, commercial-mortgage backed, credit card or auto loan assets, etc.) vehicles, and
b.) corporate and municipal bonds are invariably tailored specifically, bespoke in many ways, crafted for specific debt and investment interests.
Standardization has to incorporate some level of specificity to win adoption and eventually breathe fresh life into illiquid markets.
Interactive finance deploys
Interactive finance monetizes new behavior and sustains standardization with specificity with continually
Beyond enhancing Blackrock's market reform recommendations, interactive finance powers systemic vitality.
Vibrant Corporate Bond Markets & Systemic Reform
Systemic innovation could be at hand.
Heretofore, incumbent banks, protracting oligopoly market positions, have defined corporate bond market technological innovation for such exceptionally narrowly tailored tactical applications that markets seized and broke. The public voice of as consequential an investment manager as Blackrock championing market structure reform heralds the urgency of systemic innovation. SEC Chair White provides market administration guidance asserting regulators want investors to get more, fresh information. FINRA and MSRB can exert thought leadership to set voluntary standards, which dealers, brokers and exchanges could adopt, to realize the moment.
This combination of forces and players represents a rare, generational opportunity. Broadband is deployed, mobile devices and peripherals are intelligent, storage and memory get ever less costly, ubiquitous clouds cut all kinds of costs and boost many more efficiencies. It's just at this moment with these circumstances that consequential participants are saying that U.S. corporate bonds markets no longer function. And, all transpires in the context of historically low U.S. interest rates, currently masking the enormity of the problem, set to raise yields and lower prices. And, there are asset management investments totaling
Marketcore, a firm I advise, is pioneering interactive finance to generate liquidity and effect best executions. These capabilities connect specific, individual risk vehicles in any risk instrument with micro-to-macro market data to present current monetary and risk values in real and near real time. This, heretofore nonexistent risk clarity enables investment in bonds, tallying $38T that can free up all-but-dead capital.
To be sure, new liquidity providers in secondary markets and odd-lot electronic trading may continue to grow, but they are essentially peripheral. When markets are so opaque that trading occurs only in a small fraction of outstanding issues, transactional and risk clarity has to be restored. With best executions, mark ups and risk information clarified and presented in near real time, liquidity will be the norm and volumes and confidence will return.
Hugh Carter Donahue, Ph.D., is an advisor to Marketcore,
