Bond Market Moves Spark Regulatory Interest

May 7, 2018

Recent developments in the corporate bond market are sparking regulatory attention in the U.S. and abroad. While the biggest impact of regulations would likely fall on investment banks and other financial institutions, any future rules could have an ultimate impact on corporate issuers. Corporate bond issuances have been increasing (with some monthly exceptions) since the financial crisis of 2008, based on U.S. Corporate Bond Issuance charts from the Securities Industry and Financial Markets Association. With the yield on the benchmark 10-year U.S. Treasury bond reaching three percent on April 24, borrowing costs have climbed to a four-year high, and “a huge swath of the corporate bond market is looking increasingly vulnerable,” says Bloomberg.

Given the recent movement in key bond areas (rising yields, falling prices, rising interest rates), regulators are taking a new look at bonds. In an April 26 speech, SEC Chair Jay Clayton noted that “the fixed income markets are critical to our economy and, increasingly, Main Street investors, yet over the years less attention has been paid to their efficiency, transparency and effectiveness relative to the equity markets.” Already the Financial Industry Regulatory Authority has amended Rule 2232, requiring more transparency in corporate bond trades, effective May 14. In early April, the International Organization of Securities Commissions issued a report recommending seven actions for bond market regulators.

Meanwhile, an article in the May 3 issue of The Economist asserts that the corporate bond market will likely be the source of the next financial crisis. If this view becomes widespread, further regulation seems likely.

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