Portfolio Trading in Corporate Bond Markets

Abstract

Portfolio trading, a recent innovation in the corporate bond market, involves trading a basket of bonds as a single piece of risk with a single market-maker. We develop an algorithm to identify portfolio trades in TRACE, and show that portfolio trading increased from 1% of total investment grade corporate bond volumes in 2018 to 7% in 2021. The protocol reduces execution costs by over 40%, with the largest benefits accruing to the least liquid bonds. We link these gains to the ETF ecosystem; portfolios that are more easily priced and hedged using ETFs have lower transaction costs.

Keywords: portfolio trades, corporate bonds, transaction costs, ETFs

JEL Classification: C55, G12, G14