Commentary: It's Time To Shed Light On Bond PricesToddi Gutner
The $13 trillion U.S. bond market is the world's largest financial market. But just try to find out at what price a bond is trading. Unlike stocks, bonds don't have a central exchange or required reporting of bids and offers. So fixed-income investors, big and small, don't know how much dealers are marking up bonds. As a result, they don't know whether they're getting a good price.
More than likely, they're not. University of Notre Dame finance professor Paul Schultz found that for big institutions such as bond mutual funds, the average trading spread for corporate debt was 26 basis points. That means the fund is paying $2.60 above dealers' costs to buy and sell a bond. This depresses the yield and total return to investors.
Even though the SEC has had congressional authority since 1975 to mandate that investors have access to bond transaction information, it did nothing until last fall. That's when Chairman Arthur Levitt Jr. requested that the National Association of Securities Dealers adopt rules requiring dealers to report transactions and develop ways to disseminate prices. He also wants NASD to create a database of historical bond prices and a surveillance system to detect fraud. The House will vote this week on the Bond Price Competition Improvement Act of 1999, which requires the SEC to mandate real-time reporting of all corporate bond transactions within 12 months. The NASD hopes to implement Levitt's proposals by early 2000.
Even without SEC action, the Bond Market Assn., the industry trade group, will soon implement a voluntary system reporting end-of-day prices for some 150 corporate issues on its Web site (www.investinginbonds.com). The plan is limited, at best, since only 15 firms expect to participate. The Bond Market Assn. already lists previous-day municipal debt prices for the most actively traded issues. Piecemeal price data are available from other sources as well. For example, investors can subscribe to Govpx, a service that posts real-time Treasury prices occurring in the inter-dealer market on www.govpx.com. And major daily newspapers list New York Stock Exchange corporate bonds in their markets tables.
Price reporting is also reaching the Internet. E*Trade Group (www.etrade.com) and Morgan Stanley Dean Witter's Discover Brokerage Direct (www.discoverbrokerage.com) now list real-time quotes for Treasuries and munis from its inventory. But more must be done. There's no reason why the technology that enables any investor to check stock prices from a computer can't work for bonds. Larry Fondren, a Malvern (Pa.) entrepreneur, believes this. He wants to create a NASDAQ-like national exchange for bonds where investors can see transactions, get current prices, and execute trades. He's currently locked in a legal battle with the largest fixed-income dealers over launching his Integrated Bond Exchange.
Giving investors more price information may cost bond brokers their huge markups. But they would likely regain their losses quickly if lower trading costs attracted more investors to bonds and created a truly public market out of the current private club.