You would think that in 2008 that markets should be efficient. One market that certainly is not is the corporate bond market.
Any individual who has ever tried to buy a corporate bond knows how difficult it can be. There is no exchange for corporate bonds. They don’t trade like stocks, indexes, ETFs, or anything for that matter. Each purchase is more like buying a car than buying a stock. There is little liquidity for 99pct of the corporate bonds issued.
That is a huge problem on many levels. It makes it harder for corporations to issue bonds. It makes it hard for individuals and institutions to buy bonds. It makes it harder for buyers to sell bonds. There is no question that our money markets would be safer if there was a liquid market for the bonds money market and other funds hold. Trying to sell bonds in even small volumes can be an adventure, and thats not a good thing
The very worst part of all of this is that it makes it so difficult to buy and sell bonds, stocks dont have to compete with bonds for buyers. Think about it.Thats a disaster.
If stocks and bonds truly competed for buyers, buyers would benefit. You would see more stocks paying dividends. Consumers would realize that bonds are less risky than stocks. It wouldnt take losing all your stock in Wachovia to realize that Wachovia bonds were safer than Wachovia shares.
More competition between bonds and stocks would mean that consumers money would be safer. More money would flow into bonds and less into stocks, which means we wouldn’t see such dramatic moves in the stock market. Stocks wouldnt go up nearly as much, and they wouldnt come down nearly as hard.
One of the shocking problems of our financial system is that there is no exchange on which bonds trade. Want to know the current pricing for a bond ? You have to call someone to get the latest price. That person has to go out there and figure out what is for sale and to buy and at what pricing. And pricing is not efficient. Normally there is a HUGE spread between the buy and sell pricing. Want to buy or sell a big amount of bonds, someone literally has to go out and find buyers or sellers of the bonds. Its such a pain in the ass, and it is so incredibly inefficient, that for 99pct of consumers out there, its not worth the effort.
Which takes us to mark to market. With out an exchange, and with the barker system of buying and selling bonds, sellers in distress, like homebuyers in distress, can and will sell to any willing buyer. Which means that prices are often below where they would be if there was an exchange. For example, if I knew that I was a buyer of ABC Company bonds if they fell to X price, there is no exchange to send me an alert that the price has fallen to that price, its time to buy. Nor is there an alert for the seller to know that I am a willing buyer. The seller has to hope that the desks they use to sell knows to call the desks I use to buy. Thats ridiculous
We need a market of bonds, just as we have a market of stocks, that is just as liquid as our stock market. Then maybe rather than the Fed being the lender that provides cash, it would be just as easy for GM to issue bonds into a liquid market as it was for Bank of America to issue 10 Billion dollars worth of stock into the market.
Now maybe Im missing something or don’t see something. All I know is my experiences trying to buy bonds as a somewhat intelligent and size buyer. I have no problem saying that its a clusterfuck and it should change
18 thoughts on “Brother Can You Spare A Bond ?”
I am loving your financial advice. You need your own show so that I quit hearing about Suze Orman.
Comment by Mark Barrera -
I’ve been trying to find a place I can buy corporate bonds for a
while. I don’t have the capital to open a big account so the lack
of bond options in smaller accounts is really annoying.
Why don’t you look into starting one? It’s probably hard, but it
should be lucrative. If the spreads are really as bad as CF makes
them out to be, then you could make your money there and still
Comment by Royce Toyfu -
You are correct in that bonds are hugely illiquid as compared to stocks and we wont see an exchange any time soon because of fundamental differences in these types of securities and the way they are issued.
As a former bond trader i can tell you that the industry has traditionally shunned the chance at having more liquidity in bond markets because more visibility = tighter spreads and this means less mark ups/downs. Although certain electronic platforms like Market Axis and Trade Web have provided more liquidity for institutions and spreads have been getting much thinner between the bid and the ask, recent events have widened things out as it has become harder to find homes for distressed issues.(especially since FS companies have traditionally been the largest issuers) What everyone is also failing to mention is that Joe retail investor provides much the of the liquidity to the stock market when Joe Institution wants to bail. Corporate Bonds, based on the larger minimum required investment are prohibitive to most retail investors trading in volume and dont provide insitutions to live off individuals. Lastly I am sure you have a Bloomberg terminal by which you can subscribe to real time bond execution prices. Regardless of what the broker tells you they are accurate given the new reporting requirements. Also make sure you are trading issues with the largest float as it is the biggest determinent of liquidity outside of creditworthiness.
Comment by CF -
I own a decent size electronic brokerage which services traders of
FOREX, Equities, Options and Commodities. We built and now operate
a large FOREX ECN in a market that was very much like Bonds a few years ago.
If you have a sincere interest in a similar Bond ECN then
I would very much be interested in discussing it with you.
Let me know.
Comment by RHD -
Some bonds are listed and/or traded on the NYSE.
“The NYSE operates the largest centralized bond market of any U.S. exchange.”
Comment by Speed -
Mark, you’re amazing in that you find the key to decisive judgments regarding investemnts in a way even the most unadroit investor can understand. Thank you for your blog. I visit so that I might decipher truth in media, investing and sports. How is it that you can simplemindedly type such notes with logic that resonates with the hoi polloi?
Comment by John Garrett -
I agree with some others. Why not make one yourself! This sounds like a great potential innovation. I wish I could participate. I loved financial innovation when in business school, and almost joined Enron (the work of which I still think was brilliant).
Comment by hyokon -
Yes, this is the kind of change we need!
Here’s a perfect example of opening up a new market; sure, the
bond market exists, but its needs to really be opened up into a true,
competitive market. So it’s not opening up a “new” market per se,
but the changes you seek are so instrumental that it would seem
as though a new COMPETITIVE market is coming to the forefront.
Hell, the way intrade competes with the stock/futures markets on a
small level, it’s still competition. Imagine if corporate bonds
also added to that competition, and imagine if even other kinds of
markets were opened up.
Little by little, we can do this, and I agree–however, people need to
KNOW about these things, and their brokers/advisers can’t have
special interests with stocks, i.e., everyone should know that intrade
exists and that there is more than just the NYSE, and that,
of course, corp. bonds exist etc.
Do you think that government should play a role in this, or is it
something we should leave up to the invisible hand? Or, again, should
we both regulate the markets themselves AND the manner in which
financial advisers mention them (since they often leave them out)?
Finally, on the subject of “Maverick” ideas… I say we have a
federal lottery–we could make SOOOOOOO much revenue!!!!!!!!
Comment by Daniel Baron -
You are not entirely correct. What you are saying about having to call about pricing used to be the case, but brokers are required to report corporate bond trades to FINRA and the municipal bond transactions are required to be reported to the MSRB.
You can get up-to-date information data on bond trades (which gives your pricing) at http://cxa.marketwatch.com/finra/BondCenter/Default.aspx.
I buy and price bonds all the time. And while you are right, prices are reported, the actual price that you can buy or sell at any given point in time is not liquid, so you have to tell the bond desks what you want and at what price, or ask what they have and at what price. Its far from a liquid, efficient market
Comment by Noah -
“I have no problem saying that its a clusterfuck and it should change”
Comment by James Stevens -
This market intervention (heist) by the U.S. government is starting get downright embarrassing. Unless someone proposes an alternative before the Looters vote, the fate of the U.S. Financial Markets is left in the hands of Washington.
If The Dean were put in charge… he’d solve the problem with technology. The problem exists because OTC Derivatives (CDO’s, Swaps & similar instruments) aren’t completely transparent, and investors are no longer willing to risk billions without all the facts.
Once securitized loans become subject to more disclosure requirements (think Google-Powered Sarbanes-Oxley), a regulated OTC Derivatives marketplace could emerge. Then it would be Pension Funds in Russia, Saudi Royal Families and/or the Chinese government who bid on securitized loans. Wall Street isn’t so much facing a credit-availability problem, but rather a market transparency problem.
One thing is for sure— once this $700B bill passes, a lot of confidence in the U.S. financial markets will be lost forever.
Comment by Tom -
I think the moral of the story is whether you buy stocks or bonds, do your research. Take the time to read through the last Annual Report and a few quarters of SEC filings. (10K, 10Q and 8K) Reading about stocks/bonds on the internet and getting stock tips from emails, blogs,(sorry Mark) and chat rooms is for suckers. Nowadays you cannot fully trust your broker to give you unbiased information on a particular company. Do your research and give yourself at least a 5yr horizon with any investment. No one can outsmart Mr. Market and only fools try.
As to the bond marketplace, I can develop this in 6/8 months once I get the top 10 issuers in the U.S. to agree on a “my” format/platform.
Comment by TomH -
This brings back memories of when I worked at an investment bank and had a client who wanted specific bonds. I would have to go to the trader, and he would manually reach out to several other desks to get a feel for the market, and see which desk gives us the best offer, and sometimes it did feel like a flee market, “buy a bigger lot and he’ll drop the price a quarter point.”
Mark I have one question for you, how low a credit rating do you personally go when you buy bonds?
Comment by Barry Gitarts -
My thought while reading this was…why dont you build it. As they say, if you build it they will come. Just imagine an exchange named after yourself…DOW JONES, AMEX, CUBAN! With you tech knowledge you could do something of an E-Bay/Craig List Bond Marketplace. You have the ability and assets to pull it off and it would make a much greater footprint on America than owning some sports team…GO FOR IT!
Comment by David -
Mark, Why don’t you create one? Icahn did this for options years ago and made a pile doing it. You’v got resources, could make a good investment here and provide a service at the same time.
Comment by Steve Jones -
I’d say take the idea to its logical conclusion where stores accept Bank of America or Wells Fargo bonds as payment, but that would be unpatriotic.
Comment by Heath S -
WaMu bond holders got wiped out. It wasn’t any safer. Although your point stands.
But think about the repercussions of wiping out the bond holders on a bank failure. How many more banks will succeed in future bond offerings if the bondholders have the same risk as equity holders…
Comment by Ross Garber -
Love the posts recently (and over the years for that matter). Many of the comments/responses posted in the past few weeks have made me want to ask one question, albeit totally off topic at this point: what is a bigger problem in our society, jealousy or ignorance?
Comment by C -
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