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BlackRock Inc., the world’s biggest money manager, released a whitepaper today which describes the marketplace for corporate bonds as “broken” and in need of fixes to improve liquidity.
BlackRock, which has $4.3 trillion in client assets, urged a number of changes including unseating banks as the primary middlemen in the market and shifting transactions to electronic markets. Another solution BlackRock proposed: reducing the complexity of the bond market by encouraging corporations to issue debt with more standardized terms.
To see a list of high yielding CDs go here.
Banks have retained their stranglehold on corporate debt trading despite years of effort by BlackRock and other large investors to eliminate their oligopoly. The top 10 dealers control more than 90 percent of trading, according to a Sept. 15 report from research firm Greenwich Associates. To BlackRock, the dangers of price gaps and scant liquidity have been masked in a benign, low interest-rate environment, and need to be addressed before market stress returns.
“These reforms would hasten the evolution from today’s outdated market structure to a modernized, ‘fit for purpose’ corporate bond market,’” according to the research paper by a group of six BlackRock managers, including Vice Chairman Barbara Novick and the head of trading, Richie Prager, posted on the New York-based firm’s website.
Todays Other Top Stories
Learn Bonds: – Making sense of municipal finance, housing and more. – Tom Kozlik, a municipal credit analyst for Janney Montgomery Scott presents what we consider a well-rounded description of municipal finance at the present time.
MMA: – Municipal market brief. – Has the non-HQLA designation of municipal bonds been overblown? Has retail re-entered the market? All that and more in this months market brief.
Post and Courier: – Charleston looks to sell $5 million in bonds to fund museum, aquarium upgrades. – Charleston City Council is expected to vote Tuesday to loan the S.C. Aquarium and the Gibbes Museum of Art a combined $5 million for upgrades.
WSJ: – The muni bond lobby. – (Subscription required) What happens if states and cities with rising pension obligations have trouble finding investors for their bonds? The local politicos needn’t worry because Sen. Charles Schumer (D., N.Y.) is leaning on federal regulators to ease their fiscal pain.
Bloomberg: – Shrinking bond desks populated by journeymen as masters fade. – It was the profession that inspired Sherman McCoy in the novel “The Bonfire of the Vanities.” In the 1980s, the excitement in the trading room, with hundreds of people talking on the phone, was palpable, like a sporting event, said Kerry Stein, head of credit trading at Lloyds Securities Inc. Those days are gone.
Nasdaq: – Treasury bonds gain on haven demand. – Treasury bonds strengthened on Tuesday as worries over the eurozone’s economic growth and geopolitical tensions boosted demand for ultrasafe U.S. government debt.
FT: – Treasury market cuts U.S. inflation outlook. – (Subscription required) The U.S. bond market has slashed expectations of future inflation to their lowest level in nearly three years, highlighting the challenge facing the Federal Reserve as it moves towards ending easy money policy.
FT: – U.S. corporate bond traders go electronic. – (Subscription required) The last bastion of wild west trading on Wall Street is coming under increasing scrutiny from regulators and investors.
Reuters: – Lack of liquidity in corporate bonds hits index funds. – Index fund managers are finding it hard to secure the bonds they need at the prices they want, forcing them to make trade-offs that can hurt investors and leave managers vulnerable in a market downturn.
High Yield Bonds
Financial Advisor: – Understanding high-yield bonds? – High yield, debt securities offer higher income potential than high-quality or investment-grade bonds as compensation for their higher risk. We believe the bonds part of high-yield bonds, however, can be misleading.
Market Realist: – High-yield bond markets since the great recession. – High-yield, or junk-rated, bonds have higher yields than investment-grade bonds—like U.S. Treasuries and high-quality corporate debt. They’re issued by borrowers with higher credit risk—for example, with a lower ability to service the debt issued. Investors need a higher return to compensate for the higher risks involved.
S&P Capital Advisers: – Burger King eyes 5.75-6% pricing on $2.25B high yield bond offering. – Price guidance on Burger King‘s $2.25 billion offering of 7.5-year (non-call three) senior notes is 5.75-6%. Books close at midday tomorrow, and pricing is expected late Wednesday or early Thursday via bookrunners Wells Fargo, JPMorgan, and Bank of America.
Zacks: – Best ETF strategies for the fourth quarter. – With a recovering economy, still accommodative monetary policy and better-than expected corporate earnings, U.S. stocks have continued their slow upward march this year. Now, barring any unexpected major geopolitical flare-up, stocks seem well positioned to continue their positive momentum in the last quarter of this year.
ETF Trends: – Fixed-income investors should diversify with EM bond ETFs. – Fixed-income investors are concerned about the potential negative effects of a rising rate environment. Nevertheless, emerging market debt and bond-related exchange traded funds can provide attractive opportunities.
ETF Guide: – Here’s why bond spreads suggest increased risk. – Small cap stocks on Monday had their largest decline in seven weeks. While the Dow fell 0.6% (107 points), the small cap index was hit much harder and finished down 1.5%. The Russell 2000 index of small cap stocks continues to show weakness even though the larger cap indices are attempting new highs. As we have been warning for months, below the surface something is brewing, and it goes beyond just equities. The time to be cautious is now as corporate bonds are also warning of limited upside from here.
ETF.com: – When a free ETF isn’t cheap enough. – The U.S. Treasury issued a new type of security in January of this year: Treasury securities with floating rather than fixed rates. ETF issuers wasted little time doing what they do best—offering cheap, plain-vanilla exposure to it. But investor interest in the new ETFs has been modest.
Yahoo Finance: – 8% yields without junk-bond risks. – Closed-end bank-loan funds are unloved right now, which spells opportunity for contrarians. Randall Forsyth explains how to get income at a discount.
Common market heuristics now 1. You’re better off in stocks than bonds 2. Bonds are expensive if not in a bubble 3. Interest rates will rise
— David Schawel (@DavidSchawel) September 23, 2014
FITCH DOWNGRADES COMMONWEALTH OF PENNSYLVANIA’S GOS TO AA- (same level as Moody’s)
— Brian Chappatta (@BChappatta) September 23, 2014
Shorts drop in JPM UST active acct survey fm 69% to 54%, fall 4% to 38% in all clients survey.
— Mike Jackson (@bondscoop) September 23, 2014