Bond market still lacks transparency: survey

While many institutional investors and advisors agree that transparency within the fixed-income market is improving, a lot of work still needs to be done, according to a survey conducted by GMarkets Inc.

“People asked for broader coverage on the corporate bond markets,” says Robin Hanlon, president and CEO of GMarkets. “They want broader coverage, better prices and better quality sources.”

The Toronto-based financial information services company surveyed institutional investors and investment advisors, who gave mixed reactions when it came to a question about transparency. When asked if there has been “sufficient progress, both regulatory and industry-driven, regarding fixed-income transparency,” one respondent wrote, “We don’t have a clue about flow size, source, etc.,” while another survey contributor said, “It’s coming slowly, because only clients care. Dealers don’t.”

“You always want more transparency,” says Barbara Amsden, director of capital markets for the Investment Industry Association of Canada. “The challenge is if everybody knows the pricing and can tell who’s in the market, then you may not be able to make a return that would justify you staying in the market. In principal, transparency improves market efficiency, but as long as it’s not at the expense of liquidity.”

But while the report discusses increased transparency, advisors participating in a luncheon, co-sponsored by GMarkets and IIAC on Thursday to discuss the survey, aren’t hearing calls for more openness.

“Some of this transparency talk is being driven by someone thinking we need it rather than the hue and cry,” says Hank Cunningham, senior vice-president and director of fixed income for Blackmont Capital. “I don’t really sense a great outcry for it in this country.”

However, just because people aren’t demanding it, that doesn’t mean the industry shouldn’t take steps toward better transparency, says Cunningham.

“The more you see the market, the more people will trade it,” he says. “But there’s no way you can see every trade take place and be shown to anybody all at the same time. That’s not going to happen ever.”

What is likely to happen, says Cunningham, is that more investment advisors and brokerages will release bond prices free of charge on the Net, rather than having to go through costly sites or programs with fixed income market information.

“Right now, everyone has to pay [for information]. The industry isn’t going to do that for a market that doesn’t trade very often, and if someone did subscribe, it’s because he’s already an active trader.” Cunningham says he’s planning to put up-to-date bond prices on his website, www.inyourbestinterest.com, for free.

“People like me will start to broadcast more prices and make the market more understandable,” he says. “Individual brokers will start their own websites. They already put up stock prices; why not put up bond prices?”

While Amsden says that websites are increasingly reporting some bond prices at no cost — such as benchmark bonds on Canpx.ca — she adds that providing all information at all times isn’t feasible.

“Some of these bonds trade so rarely that you don’t always have a price,” she says. “To look at the last price they used, maybe a month ago, would give you an unrealistic view of the market. You don’t want to publish a price that could confuse people. Having information at all times for free is not going to be possible.”

Even if bond prices are readily accessible, transparency will improve only if enough retail investors and investment advisors are interested in the fixed-income market. With only 24 advisors responding to GMarkets’ survey, Hanlon admits that it was tough to glean any hard-and-fast results from the advisor portion of the report. While Hanlon says advisors’ busy schedules hindered their ability to answer the survey, Cunningham and the IIAC chalk up the poor response to a lack of interest in the bond market.

“Bonds are more boring than equities,” says Jack Rando, assistant director of capital markets for the IIAC. “They’re also more complicated than stocks…and yields on bonds are low. Investors aren’t demanding products that are yielding 3% or 4%. They’re not getting higher yields from fixed-income securities today, so investment advisors are maybe steering them towards alternative products.”

“Fixed-income securities are not a big issue in advisors’ lives,” says Cunningham. “Maybe 5% of the sales force really cares about this business.”

Of course, a low interest in bonds today doesn’t mean advisors won’t care about them later, he says. “Increased visibility of bond prices in general is going to happen as a result of growth in the marketplace, and maybe services will finally lower their fees to almost nothing. Better transparency is going to happen — it’s just going to take time.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@rci.rogers.com

(01/26/07)

Bryan Borzykowski