In the early 1990s I was a young bond trader with a Wall Street firm.
The business was not exactly like the movies, but it wasn’t too far off, either. We got to work by 7:00 a.m., set the strategy for the day — “Are we buying more or selling more?†— and then got on the phones.
The job was basically poker over the phone, trying to outbid or slightly underbid the competition, depending on the marching orders. We committed millions of dollars with no contract, no signatures, no documents… just a short statement of: “You’re done!â€
At the end of the day, we’d often retire across the street to a small bar that catered to our business. We’d swap war stories of who got stuck with what bonds, or who stole inventory from whom, and then after a few rounds we’d start to slip away, back to our apartments or homes.
The next morning, we’d be at our desks by 7:00 a.m. sharp to do it all over again.
Those days are long gone for me, and now they are fading away in general. Even though there are more bonds outstanding than ever, not only are traders disappearing, but so are trades. When interest rates start to walk higher, this could pose a significant risk to individual investors.
In 2007, the top year for daily bond trading volume, there were $32 trillion of bonds outstanding. This included $4.5 trillion of U.S. Treasury bonds (net of what is owed to government trust funds), as well as $5.2 trillion of corporate bonds.
In the years since, the U.S. government has run record deficits while corporate America has taken advantage of record-low interest rates. Bonds outstanding have ballooned to $39 trillion, including $12.5 trillion of U.S. Treasurys and $7.8 trillion of corporate bonds.
With more bonds available, it stands to reason that trading volume would increase, but that hasn’t been the case.
Even though bond issuance has mushroomed, daily trading volume has contracted. From its peak of $1,036 billion in 2007, daily trading volume declined to $730 billion at the end of 2014.
