A TECH-POWERED approach to bond trading that prices hundreds of securities all at once just had its busiest-ever month, the latest sign that systematic methods are rapidly disrupting the world of fixed income.
So-called portfolio trades are thriving, with market players harnessing exchange-traded funds (ETFs) to move baskets of bonds in one swoop as the pandemic whipsaws the credit cycle and liquidity costs bite.
Almost US$19 billion of these transactions were processed globally through Tradeweb Market Inc's electronic platform in October, according to the company.
That was the most since it launched in early 2019, and the service has now handled volume totalling more than US$150 billion.
It's a rare insight into the explosive growth of portfolio trades, which are flourishing as a quiet liquidity crisis grips the global credit market. With investors hoarding bonds as demand surges, crushing trading volumes and stoking deal costs, these ETF-centred transactions have become a vital tool.
Portfolio trading "is gaining momentum at a rapid pace", said Stuart Campbell, head of trading at BlueBay Asset Management, who has done transactions of this kind in dollars and euros across both investment grade and high yield.
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"Certainty of execution, better pricing, sourcing bonds and speed" are just some of the benefits luring investors, he said.
ETF boom
Portfolio trades have been made possible by advances in technology that allow even complex packages of bonds to be priced quickly.
Low liquidity in some of the securities is addressed in this way by moving them in a bundle.
The trades don't have to be linked to an ETF, but they tend to take advantage of the way ETF shares are created and redeemed.
Intermediaries known as authorised participants (APs) swap a basket of assets matching the fund's profile for shares from the ETF issuer, or vice versa.
Since this process happens in bulk, APs are happy to do large-scale trades with others in the market.
It's impossible to know exactly how big the business has become.
Tradeweb's competitor MarketAxess Holdings Inc doesn't publish data, while individual banks can price bond bundles using their own systems.
Bloomberg LP, the parent company of Bloomberg News, competes with Tradeweb in providing fixed-income trading services.
Accelerated growth
The Tradeweb numbers offer evidence that industry growth has accelerated this year alongside the boom in bond ETFs.
Record inflows have taken assets in US-based fixed-income ETFs to just over US$1 trillion, the highest-level ever.
They won new fans in the novel-coronavirus-triggered market turmoil in the first quarter, when liquidity in bonds and credit all but evaporated but ETFs kept trading.
"Client adoption really took off during the market volatility in March," said Enrico Bruni, head of Europe and Asia business at Tradeweb.
"Our clients are always looking out for the best way to access liquidity in every market condition and electronic portfolio trading helps them do exactly that."
The economic blow from the pandemic also caused central banks to ramp up bond-buying, while investors were left scrambling for yield after policymakers slashed interest rates.
As a result, bondholders became less likely to sell. The average bid-ask spread in credit has risen to about 95 cents globally, according to Bloomberg Barclays indexes.
With the average yield near record-lows at 1.55 per cent, the cost of doing a deal quickly eats into any returns, creating another headwind to activity.
Size matters
Corporate bond investors looking to adjust their risk profile can find other pockets of liquidity, however - some of them far deeper.
Credit-default swap (CDS) indexes represent a different set of exposures than holding cash bonds or ETFs, but the market for them is huge and highly liquid.
In October, trading in contracts that track a basket of CDS on high-grade North American firms totalled almost US$190 billion, according to Depository Trust & Clearing Corporation data.
For the equivalent European contract it was 80 billion euros (S$128 billion).
Despite their growth, ETFs represent a fraction of the debt market overall, and harvesting the benefits of portfolio trading isn't always straight-forward.
Getting the most out of the strategy is "conditional on a few factors being met pre-trade such as a diverse list of bonds, sectors and maturities", according to Mr Campbell at BlueBay. BLOOMBERG
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