The U.S. corporate bond market is largely healthy but emerging risks merit further study, according to new research published on Thursday by the U.S. Financial Industry Regulatory Authority (FINRA).
FINRA’s analysis of bond market transactions from 2003 through September 2015, has found evidence of “potentially significant changes” in how the market is working that could signal the emergence of new risks, FINRA says in a statement.
These changes include smaller average trade sizes, and a declining proportion of bonds traded in blocks of US$5 million or more, which consistent with a market that has a larger number of issues, more electronic trading, and a growing network of counterparties, the FINRA statement says.
Overall, research found that most measures indicate a healthy market, the FINRA statement notes, and new bond issuance is at a record level, transaction volumes have continued to grow, and the number of trades is rising. In addition, the cost of trading corporate bonds has been decreasing, as indicated by narrower bid-ask spreads and falling price impact to block trades.
“Given the range of public discussion about bond-market liquidity, our research provides additional, empirical evidence on the subject,” says Jonathan Sokobin, chief economist at FINRA, in a statement. “While the data indicate a robust market, they also highlight several areas of potential emerging risk that merit more attention and further study.”
According to the FINRA statement, these possible emerging risks include increased electronic trading in corporate bonds, heightened volatility in bond ETFs, and problems in high yield bonds originating in the energy sector.