Treasury talks up electronic bond-trading

Control of information by eight banks in R1.8-trillion market will end, writes Robert Brand

THE Treasury’s plan to adopt an electronic bondtrading system for banks will lead to improved liquidity, narrowing spreads between buyers and sellers and reducing prices for the securities.

The eight banks that are obligated to buy government bonds at Treasury auctions and set prices for them in the secondary market, will have to quote live bids and offers when the platform comes into operation. That will enable investors in the R1.8-trillion market to transact on a range of prices, and strip primary dealers of their “informational advantage,” says Abax Investment Management.

“At the moment, the banks control the flow of information,” said Abax’s Rashaad Tayob last week in Cape Town.

“If you have a central platform where prices are quoted, that advantage will be disrupted. You will have more transparency, and it will improve liquidity.”

The system may help boost trading, which slumped 25% in the first half to a monthly average of R477bn amid rising inflation and interest rates.

South African government bonds lost 2.3% this year, the worst return after Russia of 32 emerging markets tracked by Bloomberg.

No timeframe for the start of the electronic system was provided by the Treasury. Graham Smale, the JSE’s director of bonds and derivatives, declined to comment.

Over-the-counter trading of bonds and reporting of prices to the JSE will continue alongside the electronic platform, the Treasury said in a statement last Friday.

The bid-ask spreads that traders use to make money, range from about one basis point to three basis points for South African government bonds maturing from 2026 through 2044, according to data compiled by Bloomberg.

That compares with 0.2 of a basis point for 10-year US Treasuries, the data show. Yields on government rand-denominated bonds due December 2026 dropped one basis point, or 0.01 percentage point, to 8.20% by 12.18pm in Johannesburg yesterday.

The electronic bond-trading platform will initially be for government bonds and may be extended to other securities, the Pretoriabased Treasury said. The JSE is evaluating proposals from 12 technology providers before moving to the design phase.

The system will be mandatory for the primary dealers — five domestic and three foreign lenders — and may be extended to other banks as well as “price-takers” at a later stage. Maximum bid-offer spreads as well as minimum quote sizes will be set, and quotes will be anonymous.

While liquidity in government bonds is not seen as a deterrent, the collapse of African Bank Limited last month highlighted the difficulty of buying and selling corporate bonds in the secondary market owing to a lack of trading volumes.

Low trading volumes prevented investors, including Jonathan Meyerson of Cadiz Asset Management and Piet Viljoen of Regarding Capital Management, from transacting in African Bank debt for more than a year before the lender had to be rescued. “The issue is always to get more liquidity in the corporate bond market,” Cadiz’s Mr Meyerson said by phone from Cape Town last month.

Inclusion of corporate bonds on an electronic platform would stimulate more trading in company debt as market participants will be able to match bids with offers without having to work through intermediaries, said Mr Tayob at Abax.

While corporates have listed 1,386 fixed-income securities on the Johannesburg exchange, only R8m worth of bonds trade per day on average, JSE data show.

The JSE has been working for two years to improve the mark-tomarket process for corporate bonds, a measure of fair value that relies on pricing information supplied by bond-market participants, said JSE fixed-income manager Bernard Claassens on August 26.

“To have a screen where I can see what the best bid and offer is would be very helpful,” said Atlantic Asset Management’s Michael Grobler in Cape Town last Friday. “It’s a good move.”

Thirty-eight corporate bonds trade more than 25 times a month and 56 trade more than 10 times monthly, it said.

The system may help boost trading, which fell 25% in the first half to a monthly average of R477bn amid rising inflation and interest rates