A new on-line portal from Markit, a data provider for credit, will highlight arbitrage opportunities in the credit markets and could lead to the eventual elimination of market inefficiencies. King Penniman, president of independent high-yield research outfit KDP Investment Advisors, said having transparency across the credit-default swap, loan, bond and equity markets will quickly identify where the arbitrage opportunities are and potentially eliminate them. He added he hopes this is the case, thereby returning investing strategies to fundamental analysis. KDP will be providing its research over the portal.
Furthermore, increased transparency across the credit spectrum may prompt additional investments in high yield, added Penniman. "There is more stability and lower volatility if there's more transparency which is good for the asset class; we still have some shyness from investors needing to go down to pick up spread," he stated.
But there may be instances where the transparency will hurt liquidity as it may be difficult to unload large chunks of paper in a down-turning market, Penniman said. The National Association of Securities Dealers' Trade Reporting and Compliance Engine (TRACE) had a similar effect (BW, 6/6). "Dealers do not have the responsibility to take a loss to protect the buy-side," Penniman said, but added overall the benefits to transparency leveling the playing field outweigh its drawbacks.
