SIFMA finds support for shift in benchmarking of 20-year US corporate bonds

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The spread for many legacy 20-year US corporate bonds is benchmarked against the 30-year Treasury, but trade body SIFMA has found support for moving it to the 20-year Treasury, in line with newly issued bonds, and backing up other industry research.

JP Morgan reportedly consulted clients on a migration of its pricing for corporate bonds with maturities between 2037 and 2044 to the current 20-year Treasury beginning 1 March 2021 earlier in the year. Buy-side investor protection group The Credit Roundtable surveyed members on the issue in February and 70% believed it would increase liquidity and lower trading costs.

In its survey, conducted between 22 February through 2 March 2021, covering 32 institutions across the buy- and sell-side, SIFMA gathered market input about the potential operational challenges which might be faced when transitioning the pricing of certain tenors of legacy corporate bonds which are benchmarked to the 30-year Treasury to the 20-year Treasury.

It also assessed the extent to which a transition could impact liquidity and either support or disrupt the fairness and efficiency of secondary markets for those bonds.

Of those surveyed 78% supported a recommendation that “the secondary market trading of certain legacy corporate bonds be transitioned from the 30-year Treasury to the 20-year Treasury.”

Although a majority believed that 1 April would be feasible, 16% did not support the idea at all, whilst a range of other dates up to and beyond 1 July 2021 also found support.

The main concerns in the process were:

• Ensuring that platforms, trading venues and vendors are on board and ready prior to go-live date with a consistent implementation of the change;
• Sufficient notice of change / time to implement;
• Broker pricing algorithm readiness;
• Clarity on scope of change / impacted CUSIPs;
• Internal risk reporting / mapping / modelling;
• Transitioning old hedges to new hedges;
• Handling rolls and off the run 20yr bonds.

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