What’s the Price of a Treasury Note? It Depends on Whom You Ask

NEW YORK (Capital Markets in Africa) – The U.S. government just argued that Treasuries are sufficiently transparent when it comes to prices.

So why can’t investors agree on what those prices are?

The $16 trillion Treasuries market is the world’s biggest and most liquid bond market. But unlike stocks, it lacks a mechanism for establishing end-of-day prices that everyone can use. That means money managers sometimes value identical securities at different levels.

Tradeweb Markets Inc., one of the biggest electronic marketplaces for buying and selling Treasuries, wants to help change that. Through a partnership with New York Stock Exchange owner Intercontinental Exchange Inc., it’s now publishing closing prices for U.S. debt.

The Tradeweb-ICE partnership was announced Sept. 10, two weeks before the Treasury Department unveiled conclusions from a multiyear study of the market. It recommended a weekly release of volume data based on monitored transactions, but not their prices, a point on which stakeholders had clashed.

 “Price transparency largely exists in the Treasury market,” Deputy Treasury Secretary Justin Muzinich said Monday at the Federal Reserve Bank of New York’s annual U.S. Treasury Market Conference.

And, yet, consider the Treasury note issued in May 2017 with a 2% coupon and maturing in 2024. There’s nearly $77 billion worth of them, making it one of the largest Treasury issues in existence.

Three large bond mutual funds that held it valued the debt slightly differently at the end of the second quarter. The Bond Fund of America went with 101.1880. The Federated Total Return Bond Fund used 101.1820. Northern Fixed Income Fund marked it at 101.1758. The prices were calculated using market values of reported holdings.

By contrast, large equity funds managed by those three companies all agreed on where Microsoft Corp.’s stock ended the month of June: $133.96, which was the industrywide closing price. The investment companies declined to comment.

Lack of pricing uniformity is problematic in an investment landscape now dominated by passive money managers, who invest by simply putting money into whatever assets are in a particular index.

 “A trusted benchmark price is useful for all market participants, but the growth of ETFs and passive investment has led to increased demand for objective closing prices from ETF issuers and index providers,” Elisabeth Kirby, head of U.S. rates products and strategy at New York-based Tradeweb, said in an interview. “Elsewhere, risk and compliance teams want a robust marketwide price for evaluation and monitoring.”

In the U.S. stock market, a consortium of exchanges called the Consolidated Tape Association ensures closing prices are uniform to “avoid confusion,” according to a Securities and Exchange Commission overview of how the process works. And that information is easily accessed on endless websites, the Stocks app on iPhones and so forth. Institutional holders of stocks use those numbers to value their holdings and set share prices for mutual funds.

Trading of Treasuries is decentralized and there is no public record of transactions. So mutual funds and other institutions typically turn to price services to mark their holdings. (Bloomberg LP, the owner of Bloomberg News, is one of them.) As a result, funds may assign different values to the same security, depending on who ran the calculation and the millisecond the numbers were crunched.

Tradeweb went public in April, more than two decades after being founded as the first multi-dealer online platform for U.S. government bonds. It also offers to the trade of derivatives, exchange-traded funds, and other products. The company is producing the closing prices with ICE Benchmark Administration, which operates other indexes including LIBOR.

The Treasury prices “are designed to represent the daily mid-price for U.S. Treasury securities” at 3 p.m. New York time, and are being calculated for more than 900 issues “using prices available on Tradeweb’s institutional global platform,” the company said in a statement.

That covers a big swath of the business: Tradeweb handled about $89 billion of Treasuries trades a day last month. But that’s not the entire market. Across the industry, the daily average was roughly $700 billion in August, according to Muzinich’s presentation on Monday. And BrokerTec, the largest electronic platform for Treasuries, saw $211 billion a day, according to CME Group Inc., which acquired the business last year.

Tradeweb’s proposition is that working with ICE and auditor Ernst & Young LLP will ensure the quality of the prices. ICE Benchmark Administration, or IBA, will oversee the process by which they are calculated and verify compliance with principles for financial benchmarks developed by the International Organization of Securities Commissions. Tradeweb in 2017 took over publication of closing prices for U.K. gilts from that country’s Debt Management Office under a similar arrangement with FTSE Russell.

ICE, for its part, has been expanding its fixed-income portfolio in recent years. It acquired Bank of America Corp.’s bond-index business in 2017 and agreed to buy BofA’s widely watched Treasury volatility benchmark, the MOVE Index, last month.

The Treasury reference prices are “the first in a suite” that Tradeweb and IBA say they plan to launch, covering other markets. Tradeweb is making the prices available for free through the end of the year but expects to begin charging for them in 2020.

“It’s a worthy goal,” said Charles Parkhurst, who headed Treasury trading at banks including Salomon Brothers and Bank of America and also has managed funds.

“If they create a standard, they’d do regulators a big service because people wouldn’t be able to mark things in their favor,” Parkhurst said. But also, it calls attention to the lack of closing prices in other asset classes. “Treasuries are not the outlier,” he said. “If anything, listed equities are the outlier.”

Source: Bloomberg Business News