Fitch: Bond Trade Frequency Strongly Linked to Issue Size
30 January 2015 - 06:53AM
Business Wire
Smaller investment-grade corporate bond issues, under $500
million, trade materially less frequently than larger issue bonds
among a sample study of the underlying holdings of five major U.S.
corporate bond ETFs, says Fitch Ratings.
Low trade frequency has the potential to become a more
significant issue under market stress, which Fitch believes is a
growing risk as bond inventories are reduced and possible interest
rate hikes lie ahead.
While measuring bonds' attributes that contribute to liquidity
quality is challenging, issue size is a significant influence.
Fitch's analysis simply corroborates the point within the scope of
major bond ETFs. The matter has specific importance for ETFs
because they trade continuously, while the underlying bonds
supporting the ETFs' prices do not. A wide mismatch can lead to
ETFs trading at larger discounts or premiums to their underlying
assets.
Fitch's sample sizes were grouped by three cohorts from each of
the five ETFs. The cohorts were based on rank in holding size
within the ETFs. The first cohort represented the top 25 holdings
of each ETF, the second cohort accounted for 25 more bonds from the
75th percentile range of each ETF's holdings; finally, another 25
bonds from the 50th percentile range were chosen. After exclusion
factors, the total sample set was 358 corporate issues. Fitch
plotted issue size versus the average number of days the issue
traded in the market over a four-month period ending Nov. 28,
2014.
Click here to view related chart.
The data show that for each grouping of progressively larger
issue sizes, trade frequency increased, on average. For example,
issues sizes of over $3 billion traded 98% of the days over the
examination period, whereas issue sizes of $250 million to $499
million only traded on 28% of the days over the same period. The
incremental impact of size on trade frequency dropped most
significantly when moving to the $250 million to $499 million range
(the smallest bucket) from the $500 million to $999 million range.
Separately, Fitch found a strong relationship between a bond's
ranking order in the ETFs' holdings and trade frequency. This
implies that corporate bond liquidity is highly stratified, with
the bulk of trading activity concentrated in a small number of
issues relative to the overall market.
In previous research on high yield bond ETFs, Fitch found that
these ETFs were increasingly being used as favored vehicles to
express changing views on the high-yield market. To some degree,
this reflects the increasingly limited liquidity in underlying high
yield bond markets, as well as the growing importance of liquid
investments at a time when views on the future path of interest
rates and macro fundamentals are shifting continuously.
For prior comments on bond market liquidity and high yield ETFs,
please see "Corporate Bond Liquidity: A Look Below the Surface,"
Dec. 22, 2014; "High Yield Bond ETFs: Investors Seek Liquidity
During Market Volatility," Oct. 20, 2014 on
www.fitchratings.com.
The above article originally appeared as a post on the Fitch
Wire credit market commentary page. The original article can be
accessed at www.fitchratings.com. All opinions expressed are those
of Fitch Ratings.
Applicable Criteria and Related Research:
Corporate Bond Liquidity: A Look Below the Surface
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=833328
High Yield Bond ETFs: Investors Seek Liquidity During Market
Volatility
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=795528
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY
FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION,
RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM
THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY,
CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER
RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE
OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER
PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD
PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD
ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE
ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
Fitch RatingsRobert Grossman, +1 212-908-0535Managing
DirectorMacroeconomic Research33 Whitehall StreetNew York,
NYorMatthew Noll, CFA, +1 212-908-0652Senior DirectorFinancial
Institutions - Fitch WireorMedia Relations, New YorkAlyssa
Castelli, +1 212-908-0540alyssa.castelli@fitchratings.comElizabeth
Fogerty, +1 212-908-0526elizabeth.fogerty@fitchratings.com