Bonds weren’t pep talk at Happy hour at the World Financial Center, when I was wholeheartedly immersed in the fixed income market, and will never be. Not only because they haven’t had much juice for most income investors in the over-extended ZIRP environment that has been hopping from continent to continent; but also because fixed income mostly trades over the counter (OTC), in larger denominations (50k+ roughly) and with relatively wide bid/ask spreads. There are more reasons that pertain to specific sectors of the huge fixed-income market, but we can’t focus on those in this post. “Huge” is what we can focus on today.

Bond issuance last year was $5.7 Trillion!

This huge market has been crippled, however. It is not its size that has shrunk but its liquidity in the secondary market. In a nutshell, dealers that were those that acted as market makers in this OTC market, have withdrawn from such activities due to changing and pressing regulatory requirements. Simply said: “They aren’t using their capital anymore to run bond books.”

Image courtesy of “Mile wide, Inch deep: Bond market liquidity dries up” on Marketwatch

Dan Fuss describes the secondary corporate bond market as an ice cream sandwich: bonds change hands between the two crispy wafers on either side, but there’s a fluffy layer in between that facilitates each transaction. “It’s a good sandwich if there’s a whole bunch of ice cream on the inside,” says Fuss, who runs the $21.9 billion Loomis Sayles Bond Fund. But in recent years, that creamy inner layer, the “dealer,” has been melting.

Algomi which we discussed in spring is one of the main Fintechs whose value proposition is focused on facilitating the “melting bond dealer layer.” Trumid which launched this year, is another one that has been backed by Soros and Thiel.

While there are significant functional problems in the secondary corporate bond market; the primary market has not been on the radar screen that much. The issuance of the first cryptocurrency bond from Overstock, this summer (covered in The Overstock crypto-currency bond: a TIGRcub to settle and clear on TØ.com) is a symbolic move for both the primary and secondary bond market. It uses blockchain technology for issuance, settlement, and trading of the bond.

Origin markets, is a Fintech that aims to tackle inefficiencies in the primary corporate bond market. They came out of the Barclays accelerator and I met them as they were pitching at the UKTI tour in Switzerland. Origin markets wants to use the power of networks and implement online P2P lending for corporates.

So for example, when a large corporation wants to borrow $50 million for 9 months instead of going to their MTN shelf program, Origin proposes to find an insurance company (for example) that wants to take this private placement directly. This would save the issuer as much as 90 bps in issuance costs and could be done faster. MTN programs, Medium Term notes, are used when the amounts are “smaller” (less than $400mil) and are typically, accessed multiple times per year (shelf registration) and with various tenors.

On the other end of the market (the lending side), Origin markets can facilitate an insurance company that is receiving premiums and wants to place them immediately, instead of having to wait to gather a meaningful size. Origin markets is an online platform that could match faster their tenor and credit needs.

This is disintermediation in the primary market. Starting with the private placements part in which there are more inefficiencies and at first with the small and medium size chunks of business.

Fintech P2P lending started serving Consumers that were only served from credit card companies and Small businesses that were not served at all from banks. As these sectors are booming and becoming lending marketplaces (i.e. with heavy institutional involvement); we are now seeing the first glimpses of P2P lending/borrowing in the Corporate business space.