WASHINGTON—The Financial Industry Regulatory Authority (FINRA) issued a new Investor Alert called Bond Liquidity—Factors to Consider and Questions to Ask. FINRA is publishing this article to educate investors about bond liquidity, and the potential for decreased liquidity and investment losses for those who sell their bonds before maturity at a time of market stress.
“Even buy-and-hold investors who have no intention of selling their bonds before maturity can benefit from better understanding how bond markets work. If you are investing in bonds, you need to be aware of how the potential for decreased liquidity might impact your ability to sell a bond before maturity,” said Gerri Walsh, FINRA’s Senior Vice President for Investor Education.
Bond Liquidity—Factors to Consider and Questions to Ask provides investors with a basic primer on how bonds are bought and sold, and discusses some of the factors that have the potential to put pressure on bond liquidity. Bond investors should ask their broker or adviser:
- How does your firm handle bond trades, particularly sell orders? For instance, some firms have full-service bond desks that can commit the firm’s money to purchase your bonds, or have arrangements with dealers that offer liquidity.
- How often has this security traded in the recent past? Bonds that consistently trade with relative frequency tend to have more potential buyers and greater liquidity than bonds that trade sporadically.
- In what price range has the security traded during that time period? Investors can go to FINRA’s TRACE Market Data Center for real-time and historical transaction prices for corporate and agency bonds, and end-of-day prices for U.S. Treasury Bonds. Investors can also use the Municipal Securities Rulemaking Board’s EMMA service.
- Does your firm offer any fixed income analysis tools? These tools may help you model the impact of interest rate fluctuations on the value of your bond holdings.
- How can I construct my bond portfolio to better meet my liquidity needs? Your broker or adviser can help you determine which securities may be better matched with short-term versus long-term liquidity needs.
FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, and informing and educating the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers the largest dispute resolution forum for investors and firms. For more information, please visit www.finra.org.