In a series of articles published last week, the Wall Street Journal delved into what they are calling the “New Bond Market.” In this market, liquidity is reduced, volatility is increased and risks abound. The series follows what has been a steady stream of news this year on how the bond market has changed. We are the first to acknowledge that the market has grown more complex in recent years as broker-dealers have lessened their role in market making due to more stringent capital requirements. Overall debt outstanding, particularly in the corporate sector, has increased to record levels. Algorithmic trading has become a larger part of overall trading activity, which can potentially increase short-term volatility.
On the surface, all of these changes can seem concerning, but for long-term investors who own individual bonds, we think the impacts will be quite muted. Regarding liquidity, we penned a white paper a few weeks ago that addresses the topic (http://snwam.com/blog/?category=Minute+in+the+Market). Regarding trading, multiple trading platforms now offer buy-side to buy-side trades, which allow us to sidestep the broker-dealers entirely when making trades. Regarding the corporate market, while debt outstanding has increased, fundamental credit quality remains quite strong. We are firm believers that asset prices gravitate to levels dictated by fundamentals. While the potential for short-term deviation from those levels due to market volatility exists, we look at that as a source of opportunity, not of concern. So, as you’re reading the papers and hearing the fear described on CNBC, remember that we’ll be here focusing on finding bonds that will create value over the long-term.