US Corporate Bond Market: ‘Evolution but not Revolution’

The US corporate bond market is undergoing an evolution but not yet a revolution, according to Greenwich Associates.

The market intelligence and advisory services group makes the conclusion in its report, entitled
‘Changes in US Corporate Bond Market: Evolution, Not Revolution’
, which presents the results of the its annual North American fixed-income research based on interviews with more than 1,000 US institutional investors.

The report finds that institutional investors are taking tentative steps to utilise new sources of liquidity to execute corporate bond trades and are forming new trading relationships beyond the top dealers – many facilitated through electronic trading platforms. The average number of dealers used is up 35% since 2009.

Nevertheless, the corporate bond market in the US continues to be dominated by the top dealers. For secondary market trading in both investment-grade and high-yield bonds, the top 10 dealers by market share control of over 90% of the market.

Competition on the sell side is picking up in large part due to the cost of capital, which is hitting the largest banks hardest. But while some second and third-tier banks are expected to increase their share of trading in the secondary market, the importance of new-issue allocations to institutional investors will keep the majority of flow going through the largest banks that control the majority of bond underwriting.

Access to clients via electronic trading platforms is increasingly providing a boost to dealers hoping to break into the top 10. The firm estimates that 16% of institutional investment-grade corporate bond trading volume is executed electronically today, with four out of five institutional investors utilising electronic trading platforms for some portion of their trading.

“Everyone willing and able to quote a competitive price in response to a request for quotation (RFQ) has the ability to win business from the 80% of buy-side firms actively trading corporate bonds electronically – something not possible only five years ago,” said Kevin McPartland, head of research for market structure and technology at Greenwich Associates.

MarketAxess continues to be North America market share leader in, executing 86% of dealer-to-client investment-grade corporate bond electronic trades. Greenwich Associates believes electronic trading of trades between US$100,000 and US$5m in size will continue to grow in the coming years, with the potential to take the market-wide percentage of volume traded electronically to 20% by 2016.

Growth in electronic trading of block trades – those over US$5m – will be a much more challenging endeavour, the report concludes. These trades are the ones that the buy side brings to dealers via phone, not only for market colour and liquidity, but also to build up a relationship that ensures access to sought-after new issue allocations.

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