WASHINGTON Jan 31 Institutional investors are
more prone to "herd-like" behavior in the U.S. corporate bond
market than in stocks, according to researchers at the Federal
A Fed research paper that was posted online earlier this
month highlights investor dynamics that could intensify price
movements in the U.S. corporate bond market, where issuance has
soared as companies take advantage of ultra-low borrowing costs.
The paper, "Institutional Herding in the Corporate Bond
Market," takes a rare look at the U.S. corporate bond market
from the point of view of the prevalence of "herding," in which
investors appear to follow each other's buying or selling.
"We find substantial institutional herding in U.S. corporate
bonds, much higher than that previously documented in the equity
markets," wrote authors Fang Cai, Song Han and Dan Li, who are
all staff economists at the Federal Reserve Board in Washington.
One of the factors contributing to this behavior in the
corporate bond market was concern that institutions would suffer
damage to their reputations if they failed to follow their
peers, especially when selling a bond. Such behavior tended to
harm returns on the investment even more.
"We find significant return reversals in the post-herding
trades, especially for sell herding. This finding suggests that
sell herding in the U.S. corporate bond market destabilizes bond
prices," the authors said.
Some Fed officials worry their extraordinary policy actions
to prop up U.S. growth could help fuel asset bubbles that might
be very damaging to financial stability if they burst.
These officials, including Esther George, president of the
Kansas City Federal Reserve Bank; and James Bullard, the St.
Louis Fed chief; have cited high bond prices as a potential
source of concern. As a consequence of the Fed's bold actions,
bond prices have surged, pushing yields close to historic lows.
U.S. high-grade corporate bond issuance surged above $111
billion at the start of this year and was on track to make
January 2013 the second-busiest issuance month on record,
according to IFR, a unit of Thomson Reuters.
The Fed has held overnight interest rates at near zero since
late 2008 and tripled the size of its balance sheet to around $3
trillion through three massive bond purchase programs, in which
it has snapped up both mortgage-backed securities and Treasury
The U.S. central bank on Wednesday, at the close of its
first policy meeting of the year, said it had decided to
maintain the pace of its bond purchases at $85 billion a month.