As corporate bond issues continue at a steady pace, S&P Dow Jones Indices is looking to improve transparency of pre-trade liquidity for OTC corporate bonds with a new set of indices expected to launched early in the first quarter of 2017, according to company officials.
The ultimate goal for the new indices will be to benchmark bonds that are available to portfolio managers to buy and sell, said J.R. Rieger, managing director, fixed income indices at S&P Dow Jones Indices.
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Unlike the vendor’s existing corporate bond indices for investment grade bonds that use the minimum par amount outstanding as a proxy for liquidity, the new indices will incorporate liquidity data provided by electronic bond trading platform MarketAxess, he told Markets Media.
As part of its collaboration with S&P DJI, MarketAxess will provide the index maker with MarketAxes liquidity scoring data, according to David Krein, head of research at MarketAxess.
J.R. Rieger, S&P Dow Jones Indices
“The data includes information on bonds not traded, such as the number of bids, which gives us a good idea of the depth of liquidity,” added Rieger.
The data also will include the size of the cover, the difference between the first and second bid.
“If the cover is quite large that could tell us that they bond is less liquid than a bond that has cover bid that is tight between the first and second bid,” he added.
S&P DJI is working with two large unnamed passive fixed-income investors to work out the final calculus for each index.
“We are still in the iteration process with the users,” Rieger noted. “We are working with buy-side organizations that run money from a passive perspective to market sure that the rules that we will run actually work.”
The first indices that S&P DJI plans to roll out will be for investment grade US corporate bonds. “We are in the middle of working on high-yield US corporate bonds as well,” he said.
Rieger expects that S&P DJI will rebalance the new indices monthly.
“Since we are talking about liquidity, we need to pick up the new issues in the indices when they are available. If you wait three months, then that issues might not be available. By using actual liquidity data, we believe that we are able to identify the bonds that are incrementally more available to passive investors so that there will be less tracking error against the index, which is the ultimate goal.”
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