Market Transparency and the Marking Precision of Bond Mutual Fund Managers

Abstract

The validity of the price marks placed on bonds for valuation purposes is important for a diverse group of stakeholders, including investors, mutual fund managers, dealers, pricing services, and financial regulators. The authors analyze the dispersion of month-end price marks simultaneously placed on identical corporate bonds by different U.S. mutual fund managers, before and after TRACE dissemination and issuer introductions into Markit’s Credit Default Swap spread database. The authors find large and statistically significant decreases in newly disseminated bonds around key TRACE system rollout events. Dispersion for large, investment-grade bonds fell 20% to 83% after the start of TRACE reporting. They also find evidence of spillover effects for non-disseminated bonds. During the pre-TRACE period, some evidence that mark dispersion fell for investment-grade issuers after introductions into Markit’s database is reported. The results provide support for the idea that the TRACE transparency initiative reduced information inequality within the market’s institutional side. The original NASD concern about people “operating largely in the dark” effectively applied to professional fund managers. <b>TOPICS:</b>Mutual fund performance, exchanges/markets/clearinghouses, in markets