The giant asset manager BlackRock is initiating an aggressive call for the overhaul of a bond market that sits at the center of the United States financial industry and many retirement portfolios.
BlackRock, one of the largest bondholders in the world, said in a paper released Monday afternoon that the market for trading corporate bonds was “broken” in a way that hurts ordinary investors and companies borrowing through the market.
The push by BlackRock is the latest, and one of the most strongly worded, indications of concern about the state of the bond markets. Last week, Daniel M. Gallagher, a member of the Securities and Exchange Commission, said in a speech that “it is clear that tough reforms are needed in the fixed-income markets.”
BlackRock is an influential voice on the issue because it is the largest asset manager in the world and holds more than $1.3 trillion of fixed-income investments for clients.
Most of the public conversation about the nature and structure of the financial markets has focused on the stock markets, where there are fears about the rise of high-frequency traders and so-called dark pools.
But Mr. Gallagher and BlackRock have both said that the concerns about stock trading have overshadowed the potentially more significant costs arising from the structure of the bond market.
That structure has attracted little notice because bond prices have generally been moving in a beneficial direction for both investors and borrowers. With interest rates heading steadily lower, the trading markets have been calm.
But BlackRock and others have warned that problems are likely to become starkly apparent when interest rates begin to rise, as they are expected to do when the Federal Reserve ends its bond-buying stimulus programs.
“A less-friendly market environment will expose the underlying structure as broken,” the new BlackRock paper says.
Unlike the stock market, where trades take place on an exchange, in the bond market banks serve as a middleman. As a result, smooth trading has always relied on banks being willing to buy bonds from customers and hold them until another customer comes along looking for the same bond.
Since the financial crisis, though, new rules have pushed the banks to hold fewer and fewer bonds, leading to fears that the banks will not be in a position to buy and sell bonds when the markets become more volatile.
These fears came to the fore in May last year, when bond prices fell steeply. The declines came after Ben S. Bernanke, the Federal Reserve chairman at the time, signaled that the central bank might pare back its stimulus, which had supported bond prices.
Some investors and bankers have since asserted that, if Wall Street firms had held larger inventories of bonds, the sell-off would not have been as harsh. Mohamed A. El-Erian, who was a money manager at Pimco at the time, said that salespeople at Wall Street banks told him that they were very reluctant to buy bonds from investors during the market rout. “There was no appetite to use up their balance sheet, regardless of price,” Mr. El-Erian said in an interview.
But to some, it is not clear that regulations were to blame for the smaller inventories. For instance, economists at the New York Fed concluded last year that Wall Street dealers most likely cut back during the sell-off because they were reassessing risks in the market, not because of regulations.
Even apart from these post-crisis issues, trading bonds has long been more expensive than trading stocks for investors because of the relative opacity of the market in contrast to the transparency provided by exchanges.
Bonds have not moved to exchanges because most of them are issued in a custom fashion that makes it harder to trade them uniformly. The BlackRock paper notes that while Bank of America has one common stock, it has 1,295 different types of bonds. Someone wanting to sell one of those bonds needs to find a buyer looking for the exact same security.
BlackRock said that regulators should look at pushing banks and borrowers to issue more standardized bonds, with a limited number of maturity dates and options for refinancing.
Richard Prager, the head of trading at BlackRock, said that the biggest banks should lead the way by issuing their own corporate bonds in a more uniform fashion.
“They are in the best position to show leadership with their own issuance,” Mr. Prager said.
BlackRock also called in its paper for more use of electronic trading platforms for bonds. The company is one of many financial firms that have introduced electronic trading platforms for bonds in recent years. But none of those efforts have caught on widely. Mr. Prager said significant changes were unlikely unless the nature of bond issuance is addressed.
“We just see far too much complacency,” he said.
Peter Eavis contributed reporting.