Bond spreads widening
Thursday, October 2nd, 2008
This loss of liquidity has driven a wedge between bids and offers, allowing traders to collect higher fees, said Kumar Venkataraman, 35, an associate finance professor at Southern Methodist University’s Cox School of Business in Dallas. He wrote a study on bid-ask bond spreads in 2006.
The gap on about 1,000 investment-grade bonds averaged 32 basis points last week, excluding about 600 securities with spreads of 100 basis points or more, according to composite pricing data compiled by Bloomberg. That amounts to about $24 in commission per $1,000 bond.
The difference was about 7 basis points, or $5, for investment-grade bonds before regulators created Trace in 2002. The Financial Industry Regulatory Authority computer system disseminates prices to anyone with Internet access. The gap narrowed to about 4 basis points, or $3, immediately after, according to Venkataraman’s study, published in the Journal of Financial Economics. A basis point is 0.01 percentage point.