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Fund Spy

When Bond Prices Are a Matter of Opinion

A look at how different firms price the same bonds, including corporate bonds, Treasury bonds, and more.

The SEC has mandated a new filing for investment companies under the elegant name N-PORT. (It's all relative.) The good news is that it provides a richer, more consistent collection of data that allows for better comparisons of mutual fund portfolios. The new form can be more truly considered an electronic document than most other SEC filings, and the list of portfolio-specific data that firms must include is more extensive and practical than almost anything they've been required to provide before. The filing makes possible a range of research that would have been much more difficult to do in the past, and one key benefit is that its standardization allows us to reliably look at and compare bond holdings across funds and their asset managers.

We have dipped our toes in that water by using N-PORT data to impute and compare bond prices across funds and included an analysis of our results in a paper titled “Bond Pricing: Agreeing to Disagree.” We focused on bonds in particular because most just don't trade that often. The bond market operates in a different paradigm than stocks, which mostly trade on exchanges at lightning-fast speeds and incredibly high trading volumes. On an average day, U.S. equity markets regularly trade more than $500 billion worth of stock. U.S. corporate bonds? Maybe $25 billion to $30 billion. Other segments even less. In fact, of all the corporate bonds that traded in 2019, only a bit more than half of them traded at least once every three weeks throughout the year. (Morningstar Direct clients can download the full research report here.)

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