TRACE Celebrates 10 Years of Transparency With Record Volume in Corporate Bonds
FINRA's trade reporting facility for fixed income celebrated its tenth year of existence in July 2012. During this 10-year span, an average of 500 dealers reported at least one transaction per day, and par value traded increased from a low of $19 billion a day in 2005 to over $23 billion today, surpassing the $21 billion per day seen at the onset in 2002 and 2003. In 2010, TRACE expanded to include agency debentures and primary market trades. Asset backed and mortgage backed securities were added in 2011. Transactions in agency pass through mortgage backed securities traded to be announced (TBA) became public in November 2012, bringing transparency to approximately 85 percent of trading in securitized products.
Corporate bonds had a very strong year with record average daily trades and par value traded. Average daily trades increased 11% over 2011 to 44 thousand trades, a 1% increase over 2009, the previous all-time high. Average daily par value traded increased to $24 billion, a 5% increase over 2011, and a 5% increase over 2010, the previous high. Trades and par value traded increased for both publicly traded and private placement non-convertible bonds.
For publicly traded bonds, investment grade trades increased approximately 6% and par value traded increased 1% over 2011. High yield bonds had 21% and 11% increases in trades and par value traded, respectively. For private placement bonds, investment grade trades increased 36% while par value traded increased 17% over 2011. For high yield bonds, trades increased 31% and par value increased 21%. In contrast, convertible bond trades and par value decreased 7% and 20%, respectively, in 2012.1
Record volume is driven by new issuance: In the last 3 years, corporate bond issuers have taken advantage of the low interest rate environment. In 2012 particularly, issuers borrowed a record $1.54 trillion, up 29% from 2011. This surpassed the previous record of $1.30 trillion established in 2009.2
Record number of transactions is largely driven by retail investors: Investors have been attracted to fixed income securities since the credit crisis. More retail investors have been shifting their asset allocations from equities to fixed income instruments. From the third quarter of 2008, the height of the credit crisis, to the third quarter of 2012, retail sized trades in corporate bonds increased by more than 50 percent, from ten thousand average daily trades to sixteen thousand average daily trades. Retail sized customer trades accounted for 60% of all customer trades in 2012. In addition, the current low interest rate environment has pushed retail investors to higher yielding fixed income securities. From 2011 to 2012, average daily retail sized trades decreased 27% for agency debentures and increased 2% for investment grade bonds, while they increased 16% for corporate high yield bonds.
Today's fixed income market is dynamic. The observed trends, coupled with an evolving regulatory environment, only predict more changes ahead. In 2013, FINRA will continue to increase transparency in fixed income securities. On July 22, 2013, TRACE will disseminate specified pool transactions in agency pass-through mortgage backed securities, following the SEC's approval of the rule change in October 2012. In addition, FINRA will explore paradigms for the dissemination of transactions in collateralized mortgage obligations and other asset backed securities (such as auto loans and credit card receivables). FINRA will also review industry comments it received in Q4 2012 on potentially changing volume caps and disseminating 144A transactions.
1 Source: TRACE Data
2 Source: Bloomberg Data