By Simon Miller
Corporate bonds could become prohibitively expensive for small to medium enterprises according to research by the Tabb Group.
As US and European regulatory change forces a liquidity crisis in secondary trading, activity is being concentrated in only the largest, shortest bonds issued by the most trusted names.
Tabb said regulators on both sides of the Atlantic were challenging the traditional principal-based, market-making model for corporate bonds, forcing an end-game where bonds will trade like stocks in a transparent, equity-like, exchange framework.
“Short term, the effects of such wholesale change will be negative with secondary market liquidity damaged and more fragmented than it already is,” says Will Rhode, a London-based TABB senior analyst.
According to Rhode, over $386bn (£246bn) in investment-grade corporate bonds were issued in the US in the first 10 weeks of 2012 as yields tightened to 3.27%, the lowest level since 1973, indicating strong demand, driven in part by a strong market in fixed-income exchange-traded funds, which grew 25% in 2011 to $258bn.
Dealer corporate bond inventories currently stand at $46.7bn, down 46% from the previous year and 22% below the credit-crisis low of $59.8bn as dealers have slashed their bond holdings with a maturity of a year or more by nearly 44%.