average dai ly trading volume for both investment-and speculative …€¦ · staff q4 2016 report...

Staff Q4 2016 report on corporate bond market liquidity

Summary

This report1 describes developments in the liquidity and functioning of corporate bond

markets from October 1, 2016, through December 31, 2016. In this update, we use the same

measures of liquidity used in the previous reports for both primary and secondary market

conditions. The main findings are:

1) On balance, liquidity in the primary market- as indicated by the pace ofprimary corporate

bond issuance-remained accommodative in the United States, despite slowing down

somewhat earlier in the quarter. Both investment- and speculative-grade corporate bond

issuance volumes in Q4 stood comparable to the volumes over the same period in 2015,

and following the same trend from Q3 2016, the majority of proceeds from speculative-

grade issuance continued to be earmarked for refinancing. The still healthy pace of bond

issuance may be the result of opportunistic borrowing by firms at low corporate rates .

While yields on both investment- and speculative-grade corporate bonds, on net, increased

relative to Q3, they stood near historically low ranges over the past decade. Jn addition,

spreads for both investment- and speculative-grade corporate bonds over comparable-

maturity Treasury securities tightened notably since the last report.

2) Measures of secondary bond market liquidity that reflect the ease and cost with which

investors can buy and sell corporate bonds improved slightly in Q4, as a whole. The

1 This report has been agreed to by the staffs of the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Commodity Futures Trading Commission (such agencies, collectively referred to as the Agencies). The Agencies have expressed no view regarding the analysis, findings, or conclusions contained in this report.

average dai ly trading vol ume for both investment- and speculative-grade bonds remained

at the higher end of the ranges observed over the last five years2, whi le the average daily

trading turnover3 for both investment- and speculative-grade bonds fluctuated around a

level typical for the past five years. After adjusting for seasonal patterns, average bid-ask

spreads for investment-grade bonds remained unchanged on net since the last report,

standing around the lower ranges of its distribution since 2010. The average bid-ask

spreads for speculative-grade bonds declined steadi ly over Q4, fluctuating below the

median levels observed since 2010. The fraction of trades with large face value - at least

$1 million - and the average size of such trades for both investment- and speculative-grade

bonds were little changed from their Q3 levels. Meanwhile, dealers' inventories of

corporate and foreign bonds are little changed in the third quruier of 20 16 (latest data

available) from the previous quarter, but remained near their lowest levels over the past

decade.4

2 See Exhibit 2, "Trading Volume and Turnover (Seasonally Adjusted)" and "Trading Volume by Rating (Seasonally Adjusted)."

3 The average daily trading turnover is a measure of trading volume relative to the face value of bonds outstanding.

4 "Corporate and foreign bonds," as defined in the Federal Reserve's Financial Accounts of the United States, includes, in addition to bonds issued in the United States by U.S. corporations and foreign corporate and sovereign entities, a ll other fixed income instruments (excluding syndicated loans) that are issued in the United States, such as privately-issued mortgage backed securities.

Exhibit 1

Corporate Bond Liquidity Monitor

Gross Issuance of Nonfinancial Corporate Bonds

Quarterly

- D Investment Grade

• Speculative Grade· -

• 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 201 4 2015 2016

' Includes unrated bonds. Source: Mergen!.

Use of Proceeds for Speculative Grade Issues*

Quarterly General Purposes·

M&A Recap tahzat1on

Refinancing

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

·General Purposes includes capital expenditures and other purposes not included in the designated breakdown. Source: Standard and Poor's.

Ten-Year BBB Bond Yield and Spread to Treasury*

7

6

5

4

3

2

Monthly

Yield (right scale)

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Billions of dollars 350

- 300

- 250

Q4 - 200

150

- 100

50

II

Billions 80

60

40

2004

0 2016

Percent 10

9

8

7

6

5

Dec. 4

3 2016

·Estimated from curve fit to Merrill Lynch bond yields. Treasury yields fro m smoothed yield curve estimated from off-the-run securities. Within-month average value.

Source: Staff Calculations.

0

Exhibit 2


Number of Traded Bonds as a Fraction of Total Disseminated* Percent of Par Percent of Par

30 5-day Moving Average

last repo

25

Jan. 2 20

an. 15 2

10 2006 2008 2010 2012 2014 2016 2014 2015 2016

·only trades of bonds that have been issued for 60 days or more at the time of trading are included. Excluding 144a bonds. Source: FINRA, Mergen!, Moody's ORD.

Trading Volume and Turnover* (Seasonally Adjusted) Percent Billions of dollars Percent Billions of dollars

5-day Moving Average

200

160

120

80

40

0

Trading Volume by Rating (Seasonally Adjusted) Billions of dollars

5-day Moving Average Investment Grade

Speculative Grade

Jan. 2

5-day Moving Average Volume (right scale) Turnover

(left scale)

Jan. 2

2006 2008 2010 2012 2014 2016

·only trades of bonds that have been issued for 60 days or more at the time of trading are included. Excluding 144a bonds. Note: Turnover series is annualized by multiplying the daily turnover with 251. Source: FINRA, Mergen!, Moody's ORD.

2006 2008 2010 2012 2014 2016

Source: FINRA.

30 200 5-day Moving Average

24 160

18 120

12 80

6 40

0 0 2014 2015 2016

Billions of dollars 30


last re or

20

15

10

25

5

0 2014 2015 2016

30

28

26

24

22

20

18

30

24

18

12

6

0

30

25

20

15

10

5

0

Exhibit 3


Bid-Ask Spread for All Bonds* Percent


Investment Grade 5

Speculative Grade

4

3

Jan. 2

2

0

Percent


last report

2014 2015 2016

Percent


last report

1 ' I' r

I •1 If_·~l I •~1 / ~tiI I '.II t I\ ,, "/II.~~,~: 1i~~~,W~~~l · . ,~an.I~ I·- I~(

' l < ' ' 2

2014 2015 2016

Percent


last report

3.0

2.5

2.0

1.5

1.0

0.5

0.0 2005 2007 2009 2011 2013 2015 2017

Bid-Ask Spread for All Bonds* (Seasonally Adjusted) Percent

5-day Moving Average Investment Grade

Speculative Grade

Jan. 2

2005 2007 2009 2011 2013 2015 2017

Bid-Ask Spread for Investment Grade Bonds* Percent

Jan.

5-day Moving Average Financial

Non-Financial

2

2005 2007 2009 2011 2013 2015 2017

·All measures are computed for non-defaulted bonds on the secondary market that have traded at least 1 O times between 10:30am and 3:30pm. Excluding 144a bonds. Bid-Ask spread is the difference between weighted average dealer bid prices and ask prices.

6

5

4

3

2

0

4

3

2

0

2.00

1.75

1.50

1.25

1.00

0.75

0.50

1.5

1.4

1.3

1.2

1.1

1.0

0.9

0.8

0.7

0.6

0.5 2014 2015 2016

Exhibit 4


Percentage of Trades Greater than 1 Million in Par Value* (Seasonally Adjusted) Percent


40Investment Grade

Speculative Grade 35

30

25

20

Jan. 2

15

10

5

0

Percent


last report

45

40

35

30

25

20

15

10

5

0 2006 2008 2010 2012 2014 2016 2014 2015 2016

·only trades of bonds that have been issued for 60 days or more at the time of trading are included. Excluding 144a bonds. Source: FINRA, Mergen!, Moody's DAD.

Average Size of Trades that are Greater than 1 Million in Par Value* (Seasonally Adjusted) Millions


Investment Grade 6

5

4

3

Speculative Grade

Jan. 2

2

Millions

/·/ .~,~~i:~.~..),.'f~..~1vi~\J, I • '

'


last report 6

5

4

> ,,, • 3

2

2006 2008 2010 2012 2014 2016 2014 2015 2016

·only trades of bonds that have been issued for 60 days or more at the time of trading are included. Excluding 144a bonds. Source: FINRA, Mergen!, Moody's DAD.

Broker-Dealer Holdings of Corporate and Foreign Bonds* Billions

420

380

340

300

260

220

180

140

100 03

60

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 20

·series FL663063005.Q. Aggregate holdings of U.S. corporate and foreign bonds by U.S. domiciled security brokers and dealers. It includes all other fixed income instruments (excluding syndicated loans) that are issued in the United States, such as privately-issued mortgage backed securities. Source: Federal Reserve. Financial Accounts of the United States.

average dai ly trading volume for both investment-and speculative …€¦ · staff q4 2016 report...

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