Finra is examining whether Wall Street firms overcharge investors and whether they unfairly allocate new corporate debt issues to reward certain clients, Nancy Condon, a spokeswoman, confirmed in an e-mail last week.
It’s getting tougher to trade bonds as the business gets less profitable for Wall Street. Corporate-debt trading volumes in the U.S. have failed to keep pace with issuance, increasing 14 percent since 2010 as outstanding notes grew by 33 percent, according to Finra and Bank of America Merrill Lynch index data.
Bondholders Hurt
Requirements that banks hold more cash in the event their investments tank have prompted dealers to reduce their inventories, giving the biggest managers even more sway in the market. The largest dealers had slashed their holdings of corporate bonds to $56 billion as of a year ago from $235 billion in 2007, according to Fed Bank of New York data. The inventories worked to cushion against price swings and made it easier to trade in larger sizes.
“There may be limits to what regulation can achieve,” New York Fed analysts Samuel Antill, David Hou and Asani Sarkar wrote in a March 27 report. “Financial growth has occurred in the more opaque and harder-to-regulate sectors,” they wrote.
Biggest Funds
All bondholders are hurt when the biggest funds unload securities. When investors yanked a record $61.8 billion from broad-market bond funds in the first nine months of last year, it helped spur about $410 billion of losses on $20.5 trillion of U.S. government and corporate debt, Bank of America Merrill Lynch index data show. That was the securities’ worst performance since 1994.
Benchmark 10-year Treasury yields rose to 2.64 percent at 10:20 a.m. in New York after earlier touching 2.6 percent, the lowest level since March 3, according to Bloomberg Bond Trader prices. The yield climbed to 3.05 percent on Jan. 2, the highest since July 2011.
Barclays Plc strategist Jeff Meli said in August flows are “showing up real time in performance” since dealers aren’t buffering against such lurches as much as they used to.
The New York Fed routinely monitors market liquidity as part of its financial stability role for the central bank, and officials are seeing what they can learn from last year’s bond market sell-off. New York Fed researchers wrote in an Aug. 5 blog post the sell-off was “steeper than most historical episodes.”