When the interest rate cycle turns vicious When the interest rate cycle starts turning, an exit strategy really matters. Having pumped record amounts of cash into corporate bonds, investors are learning that entering the market is a lot easier than leaving. The problem is that, while companies can sell large chunks of debt at opportune moments - think of Apple attracting $52bn of orders for its record $17bn offering at the end of April - turning around at a later date and trying to sell your holdings in the so-called secondary market is a very different proposition. Unlike the common equity price for a company that can be bought and sold effortlessly, corporate debt consists of thousands of individual bonds with various interest rate coupons and maturities. This fragmented market structure is why trading in the secondary market generally consists of small orders in the vicinity of a few million dollars at a time. The situation has only deteriorated since the financial crisis, thanks to tougher capital and risk management rules, with dealers retreating from supporting the bond market. Hardly a comforting backdrop for investors in the $5.5tn US investment-grade corporate market when the Federal Reserve is signalling a desire to reduce its hefty stimulus in the coming months. The boom years of record investor inflows and a central bank pulling interest rates to artificially low levels have long sowed a sense of foreboding among leading players in the market. They fear that, when the cycle turns, the rush for the exit could have the makings of being far worse in terms of volatility and losses than in previous bond routs. A liquid secondary market that can help offset the mass sale of bonds and contain investor panic is badly required but the industry is struggling to reach common ground. Over at BlackRock, the topic animates the fixed income team. This week the world's largest fund manager made a renewed push to get the market thinking about how to be a cleaner, easier place to trade. The solution, which it readily admits is no silver bullet, would involve Wall Street banks assuming a leadership role and setting a standard for other corporate treasurers to follow. In essence, companies would issue bonds at regular times during the year, as done by the US Treasury. This would greatly reduce the amount of individual bonds issued and a standardised market would concentrate liquidity to the greater benefit of investors. But the proposal has received a lukewarm reception from banks, which are among the biggest debt issuers, and other investors. They question why corporate treasurers would forgo the flexibility of being able to tap the market whenever interest rates declined or when a company wanted to fund an acquisition or stock buyback. The abiding principle for a corporate treasurer is to maximise flexibility and not risk being shut out of the funding market, so staggering and diversifying debt sales is a prudent strategy. It is easy to see why BlackRock wants a better secondary market. Like other big investors, it focuses on harvesting total returns from a bond portfolio, which consists of capital gains and the income received by holding securities. A liquid secondary market would help these types of investor adjust their portfolios and maximise investment returns. Some standardisation of the bond market is unavoidable over time, argues BlackRock and other big investors. The drive by banks to cut costs and embrace electronic trading is one factor, while the rise of fixed-income exchange traded funds that need a liquid secondary bond market only accentuates the need for the market to become more streamlined. One way to get there faster would be for banks to look at selling at least some of their debt in a more standardised manner. With their trading desks providing less support for the market, there is a view among the big bond investors that they should take a leadership role on the issuance side. With the normalisation of interest rates brewing, investors need a buoyant secondary bond market more than ever. Until then, they had better like the bonds they own or accept that getting out early will come at a cost.