S&P to roll out new bond index

(January 11, 2005) Standard and Poor’s has announced the creation of the S&P/TSX Canadian Bond Index, which will be officially launched in the first quarter of 2005. Bond rating and indexing are essentially S&P’s raison d’être, so the marriage of the two seems to make sense.

“Standard & Poor’s is renowned for its highly valued opinions in rating fixed income securities, and providing relevant equity benchmarks that gauge the performance of the world’s markets,” said Steve Rive, vice president of Canadian index services at Standard & Poor’s. “The S&P/TSX Canadian Bond Index further exemplifies our commitment to the Canadian market.”

The new index was developed by S&P along with CIBC World Markets and RBC Capital Markets, which will initially provide pricing data, and the TSX, which will serve as the data distribution vehicle for the new index.

The S&P/TSX Canadian Bond Index is meant to represent the returns of investment-grade bonds issued by Canadian companies and the government. The total index will comprise roughly 900 investment grade bonds.

“Investment grade bonds are really the core of the market and we felt that’s where there would be the most demand and interest in an index,” says Rive. “We’re covering the investment grade component, but the index supports roughly 300 sub-indices, which break out the index by maturity, by credit rating, by sector — you can slice and dice in all different ways.”

In the past, the bond market has been criticized for its lack of transparency, since there is no centralized trading system, as there is for equities. Trades are conducted directly between those holding inventory and the buyer, making the process less like an auction and more like a flea market.

Due to their deep pockets large financial institutions — such as the big banks — tend to dominate the market. Indexing the bond market has long been the domain of Scotiabank, which developed the Scotia Capital Debt Market Indices and has been offering debt market indices for more than 50 years. The new S&P index will provide a rival benchmark for fixed income portfolio managers.

Unlike the traditional model used by dealer firm indices, the S&P index will blend price data, arriving at an averaged value of a given bond. In the early stages of the new index, CIBC World Markets and RBC Capital Markets will serve as providers of price data, but S&P hopes to bring in more data providers to ensure independence and objectivity.

“This will offer a much wider view of where the market is for a given bond within the index,” says Rive. “The more data points you have going into the blended price, the better. Our rule for the index includes that there be at least two price providers for each bond in the index. Obviously, if we can have more price providers, it’s all the better.”

The agency also says its index will differ from existing broker-dealer controlled indices in that it will be “user based.” The firm plans to consult with an advisory panel made up of institutional investors, consultants and actuaries to ensure the index reflects their needs.

“We believe we do have a ‘better mousetrap’ due to the objectivity and independence,” says Rive. “At the same time, we recognize that the competition has a very wide following and they’ve earned that following with a lot of hard work. We’re going to have to work hard too to earn a similar standing.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com