Bond Traders Ought to Swap Mythology for Modernity

(Bloomberg Opinion) -- There’s something almost mythical about the current corporate-bond trader.

While stocks and exchange-traded funds are available to buy and sell across several electronic platforms for investing newcomers and veterans alike, and U.S. Treasuries are auctioned based on a regular and predictable schedule, credit traders wake up every morning without a clear picture of what the day will bring. They rely on their Wall Street contacts and industry experience to size up the new-issue corporate-debt market and quickly determine whether they should bid on new securities and at what price. Making that calculation often requires both knowledge of broad global market sentiment and micro-level credit analysis, all in the span of hours.

To adrenaline-craving traders, that probably sounds exhilarating. But it’s just as likely exhausting, particularly given 2020’s breakneck pace of new deals: U.S. investment-grade bond sales reached a yearly record this week, exceeding the previous all-time high of $1.3 trillion for all of 2017. Even though spreads on high-grade corporate debt have relentlessly narrowed this year, providing steep gains across credit funds, investors still prefer to have reasoning for their decisions and comprehensive information at their disposal instead of just chasing a rally indiscriminately.

At least that seems to be the message behind a letter published Monday by the Credit Roundtable, an industry group that comprises big-name asset managers like AllianceBernstein Holding LP, Franklin Resources Inc., PGIM Fixed Income, T. Rowe Price Group Inc. and Vanguard Group Inc., along with insurance companies and California’s two main public pension funds. As Bloomberg News’s Molly Smith reported, it’s a push to make Wall Street and regulators adopt industry standards that are seen as long overdue when the biggest banks are gearing up to introduce an electronic platform for new offerings.

There’s no question that the new-issue corporate-bond market appears archaic in comparison to Robinhood and other instant-trading apps. The entire process ends up taking about a day for investment-grade bonds: First an early-session announcement (Bloomberg terminal headlines declare NEW DEAL); then sometimes updated pricing relative to initial levels based on investor demand (GUIDANCE); then the actual launch that reveals or updates the size of the offering (LAUNCH); and ultimately final terms (PRICED). In the meantime, behind the scenes, traders might pass along what they hear about the size of investor bids and speculate just how much the “oversubscribed” order book will cut into yields. (Bloomberg LP, the parent of Bloomberg Opinion, provides services that facilitate bond ordering and distributes information on new debt offerings.)

This year has featured severe repricing in favor of borrowers. According to Smith, yields on investment-grade bonds in 2020 have compressed more than 31 basis points on average between initial talk and final pricing, compared with less than 19 basis points in 2019 and 15 basis points in 2018. As it stands, companies have an advantage over investors because even though they might know the ideal size for their bond deal, they don’t need to disclose that figure right away. In one dramatic example during the height of the coronavirus crisis, cruise line operator Carnival Corp. dangled a huge 13% yield on its investment-grade bonds, drummed up roughly $17 billion in orders, then boosted the offering to $4 billion while trimming the coupon to 11.5%.

The Credit Roundtable’s recommendations largely boil down to standardizing information and communication across new deals. The group suggests either a borrower provides “expected” credit ratings when the deal is announced or the rating companies confirm their grades within 15 minutes. Investors also want an indication of the initial deal size during the “announcement” phase, along with specific maturity dates and disclosure of any nonstandard terms. Throughout the process, they’re asking for frequent order-book updates to get a more transparent look at demand. Pricing should be wrapped up by 4:30 p.m. in New York or else risk pricing the next day.

All of this sounds perfectly reasonable on its face. “It’s an effort to bring the underwriting and distribution of corporate bonds into the 21st century,” said David Knutson, vice chair of the Credit Roundtable and head of credit research for the Americas at Schroder Investment Management.

So then why have these seemingly common-sense, pro-transparency adjustments remained elusive for so long? Those who follow the battles within corporate-bond market structure might recall that BlackRock Inc. and Pacific Investment Management Co., neither of whom are part of the Credit Roundtable, were on the same side recently in advocating for a pilot program that would reduce secondary-market transparency in exchange for potentially better liquidity. T. Rowe Price and Vanguard, by contrast, were among those that opposed the initiative. However, while shrouding large corporate-bond block trades in secrecy quite obviously benefits BlackRock and Pimco, it’s not as clear how keeping the current primary-market process in place gives them a disproportionate advantage.

It’s possible Wall Street’s biggest banks stood in favor of the old way of doing things, but that seems to be changing. Smith’s reporting suggested the bond-buyer group wants to seize on momentum from the coming launch of DirectBooks LLC, an electronic platform for new debt offerings backed by Bank of America Corp., Barclays Plc, BNP Paribas SA, Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Wells Fargo & Co. Or, put another way, it has the support of the seven largest U.S. investment-grade bond underwriters, and nine of the top 11, together responsible for bringing almost $1 trillion to market this year.

Maybe I’m being overly optimistic given the bond market’s history of slow progress, but it’s hard to come up with a serious case against this modernization push. That’s especially true for investment-grade debt — companies with high credit ratings are frequent borrowers and far less likely to try to sneak through unfavorable lender protections or otherwise catch investors by surprise, in contrast to high-yield bonds and leveraged loans.

The only thing in jeopardy might be the image of bond traders as ultra-connected Wall Street denizens who pore over pricing updates from bank syndicates as they hit their screens. After all, it’s hard to maintain the three-decade-old reputation as Masters of the Universe when on a level playing field for information, not to mention when robots are doing an increasing share of the work. Taking obvious steps to democratize the primary market for corporate bonds is worth a dent to the mythos.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

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