A new whitepaper issued by Blackrock argues that the secondary market for corporate bonds is “broken,” but that “current environment of low interest rates and low volatility, coupled with the positive impact of [quantitative easing] on credit markets” mask the extent of the issue. According to the paper, regulatory changes imposing increased capital requirements and trading restrictions coupled with the decentralized nature of fixed income trading have reduced dealer inventories and made them ineffective market makers. To remedy the lack of liquidity, Blackrock suggests four changes:
· trading venues must move away from dealer-focused markets to “all-to-all”;
· trading protocols must be updated to facilitate transactions more efficiently than the current request for quote method;
· offerings must be standardized to reduce the total number of products; and
· stakeholders must accept and embrace necessary changes to the fixed income markets.
The paper comes at a time of increasing concern over fixed income markets. Last week, SEC Commissioner Dan Gallagher covered similar warnings in a speech, arguing that issues with bond markets could lead to a free fall in prices. Bloomberg and the New York Times covered the paper, which can be found in its entirety here.