30 April 2024

FT Alphaville: When light floods Europe’s bond market

In the beginning Europe created the union and the currency. But the bond market was without form, and void; and darkness was upon the face of the deep. So the Commission said: ‘Let there be light: and there was light.’

And Europe saw the light, and it was good; and Europe divided the oddlots from the block trades. Apologies to Genesis 1:1–4, but this was the first thing that leapt to mind when FT Alphaville read an interesting report by Barclays credit strategists on the introduction of a consolidated tape for Europe’s financial market.

This is A Very Big Deal across the board, but especially so for the corporate bond market, which in Europe is balkanised and opaque even by fixed income standards, with only an estimated 8 per cent of trades reported in quasi-real time. That is now going to change radically, and the impact will ripple through Europe’s bond markets and shift how fixed income is traded, according to Barclays analysts.

Here are their main points, with FTAV’s emphasis below: — Faster disclosures and the arrival of a consolidated tape will dramatically increase transparency in the European corporate bond market, from the current 8% of transactions reported in real time to over 80%. The tape will provide a single reference source for prices and volumes, making trading data available to a wider range of market participants. — We find that, under current market conditions, the effects of transparency on corporate bond liquidity are more varied than previously thought. Transparency decreases transaction costs for small trades and newly issued bonds, but it increases transaction costs for large trades and more aged instruments.

These nuances are related to two important changes in the corporate bond market over the past 20 years: post-crisis regulations that raised capital charges for banks and increased the cost of inventory, and the introduction of ETFs.  ....

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