Morgan Stanley and Lehman Brothers are developing a host of corporate bond baskets to build on what they say is considerable investor interest in this rapidly expanding new market. Morgan Stanley plans to unveil one or two more versions of its 10-year basket, called TRACERS, in five- and/or 30-year maturities in the next two weeks, and may eventually launch sector-specific products as well, says Tom Thees, the firm's New York head of investment-grade trading. Lehman just last week launched TRAINS in five- and 10-year baskets, and will be introducing similar products over the coming months in response to requests from investors, according to Rick Rieder, co-head of global credit trading at Lehman. Rieder declined to be more specific.
TRACERS and TRAINS comprise baskets of highly liquid investment-grade corporate bonds that track benchmark bond indices. Morgan Stanley's Thees says TRACERS has become the most active secondary security in the corporate bond universe since it was launched Oct. 16. He says TRACERS has brought the firm over $8 billion in trading business.
Bob Auwaerter, portfolio manager at Vanguard Group, says that while he cannot verify Thees' claims, he is impressed that Morgan Stanley is able to make markets of $100 million and up in TRACERS with only a three basis-point spread, suggesting that the market for the security is highly liquid. Nonetheless, Auwaerter favors Lehman's TRAINS because it has a five-year product, which better suits his needs as a manager of short-duration funds. He says he has not purchased the 10-year TRAINS or TRACERS. Another advantage of TRAINS, he says, is that it contains sovereign credits. He also notes that credits are weighted so that, using the five- and 10-year product in some combination, an investor can achieve a par weighting that closely replicates the Lehman corporate index.
Others say the advantage of TRACERS is that it allows investors to quickly add to and reduce corporate exposure much more quickly and easily than by trading bonds of individual companies. Fred Hoffman, portfolio manager at Alliance Capital, says his firm has bought and sold TRACERS, and still owns some in its portfolio. He says he has not yet familiarized himself with TRAINS sufficiently to compare the two products. He says he believes other firms are working on similar products, though he declines to say which firms. He believes products similar to TRACERS may eventually replace swap spreads in the credit market.