What is an 'Active Bond'

An active bond is a corporate bond or other fixed-income security that is frequently traded at large volumes on the New York Stock Exchange (NYSE). This is not to be confused with actively managed bond investment strategies.

BREAKING DOWN 'Active Bond'

Active bonds are traded by active bond crowds, which are traders who buy and sell bonds that are frequently traded. Active bond orders are typically filled quickly due to the presence of higher demand from investors, and they generally have lower bid-ask spreads. Because of the higher liquidity of active bonds, active bond traders are usually better able to dictate prices.

This is different than infrequently traded bonds, which are traded by the inactive bond crowd. An inactive bond crowd is a group of exchange members who buys and sells bonds that are infrequently traded. Limit orders placed by the inactive bond crowd may take a longer period of time to fill due to the absence of frequent trading. The inactive bond crowd is also known as the cabinet crowd. Before electronic trading, orders placed by those in the inactive bond crowd were stored in cabinets off to the side of the general trading floor. This gave rise to the cabinet crowd nickname.

All else being equal, larger trades generally cost less than smaller trades; small institutions pay more to trade than large institutions; and small bond dealers tend to charge more than larger dealers.

Why Invest in Active Bonds?

Active bonds can be an appealing choice for some investors because, as fixed-income securities, the price of the bonds is generally unaffected by their high trade volume. Also, active bonds often have higher ratings from agencies such as Standard & Poor’s and Moody’s. Taking these features together, investors often use active bonds for portfolio diversification or as a relatively safe investment during periods of market volatility.

Analyzing Active Bond Trade Frequency

Many financial publications publish a daily chart that shows the 10 most actively traded securities, based on the total par value traded, in each of the corporate bond market’s three sectors: investment grade, high-yield and convertibles. Investors can use this data to compare the market value of the corporate bonds they own or are considering to purchase. As noted by the Securities Industry and Financial Markets Association (SIFMA), higher trade volumes for a specific security often means higher liquidity, better order execution and a more active market for connecting a buyer and seller. The day’s most actively traded corporate bonds also may reveal where bond investors see the greatest opportunities and risks in terms of industries and issuers.

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