NEW YORK - Paul Volcker hasn’t endeared himself to Wall Street bond dealers. That’s just fine with Fidelity Investments.
While the U.S. Dodd-Frank Act’s Volcker Rule has curtailed the ability of banks to use their own money for trading, the biggest money managers have stepped in, using their growing buying power to absorb at a discount large amounts of bonds that get put up for sale. Those are opportunities that smaller buyers may never see.
“We’re now being viewed as a liquidity provider in the marketplace,” Ford O’Neil, who manages the $13.2 billion Fidelity Total Bond Fund in Boston, said in a telephone interview last week.
Dealers’ reduced capacity to trade bonds is a boon to the largest investors, who can buy large chunks of bonds at attractive prices. Smaller buyers may never get those offers.
“A lot of these Wall Street dealers often don’t like to have to make 20 or 30 phone calls” to sell a block of debt, so “it may make sense to make a call to one or two big money managers and offer the securities at once,” said O’Neil, whose Total Bond Fund has outperformed 75 percent of its peers over the past five years, according to data compiled by Bloomberg.
The business of bonds is changing after stricter capital requirements and risk-curbing rules prompt the world’s biggest dealers to shrink their balance sheets and staff. Banks are working more closely with the largest asset managers than they did before the 2008 financial crisis after cutting their company-debt holdings by 76 percent since the peak in 2007.
Now “the dealer has to act in a pass-through” capacity, turning to larger investors when clients ask them to sell bonds, said Dan Fuss, vice chairman at Loomis Sayles & Co. in Boston, which oversees about $210 billion. “The smaller firms are starting to gripe on this.”