Big Corporate-Bond Trades Wane as Liquidity Ebbs, Says Barclays

The explosion of issuance in the corporate-bond market is hiding evidence that it may be getting tougher to trade, according to Barclays Plc. And it may prove costly for investors.

It’s a decrease in large transactions that analysts led by Shobhit Gupta point to as a worrying sign in a client note Thursday. The average size of "block" trades -- defined by Barclays as transactions over $5 million -- declined by more than 6 percent over the past year, to $11.1 million from $11.9 million.

And "large block" trades, deals of more than $25 million, have fallen to 16 percent of all block trades from more than 20 percent last year, Barclays said. Total turnover in corporate bonds has declined to 72 percent of the market this year from as high as 90 percent in 2011.

"Liquidity in credit markets remains challenging," the Barclays analysts wrote. "This implies that if portfolio managers are out of the market for even a short period -– say, because of fund outflows -– the portfolio liquidity profile could worsen severely. To ensure that portfolios remain adequately liquid, managers have to keep switching into recently issued securities, potentially incurring additional transaction costs."

Concern about the ease of buying and selling has grown as the Federal Reserve readies the first step in ending the easy-money policy that helped sparked the explosion in the company-bond market, pushing more investors into higher-yielding debt. Companies have sold more than $8.5 trillion of U.S. dollar-denominated bonds in the past five years.

Corporate bonds have lost 0.4 percent this year, following six straight years of gains, according to Bank of America Merrill Lynch Indexes.

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