Recent bond market volatility has exposed the continuing lack of integrity in bond price data. The time really has come for a Fixed Income data infrastructure re-set.
The bond market needs transparency in pricing.
So says GTS principal Reggie Browne, the so-called Godfather of ETFs, when asked about how to address a discrepancy that has appeared in bond ETFs during the last few weeks.
Many bond ETFs, like the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), have been trading well below their net asset value, the fair price of a fund. This means that bond ETFs have been trading at a discount.
Much of this has been attributed to bond pricing services, which experts say have reacted too slowly, lagging behind the current volatile market environment.
Browne believes that refinements are needed for more accurate pricing of bonds.
“I think you need more transparency where bonds are trading real time, [to aggregate] where the prices are at and find a best bid, best offer [so that] there’s a lot of increased confidence where bonds are trading, just like you have in equities,” he said Monday on CNBC’s “ETF Edge.”
There are challenges, however, especially given the structure of the bond market. Browne says only 20% of the bond market trades daily, making it difficult to determine a “real-time pricing agent” because the vast majority of the market doesn’t trade every day.
Browne said the solution is a self-regulatory organization that could work toward creating a secure information processor to “transmit where bonds are pricing real-time.”
He said he knew “a couple committees” at the Securities and Exchange Commission were looking into potential solutions.