Bond Traders Lucky For Liquidity

Terry Flanagan

Bonds have been long coined the less “tradable” counterpart to equities, but the current state-of-play of the markets has shined more liquidity on the asset class.

Liquidity has been long prioritized by those that trade the often-cryptic bond market. The asset class has been characterized by long-term debt plays, but fixed income buy-and-hold investors recently have moved aside to make room for more active traders, in part due to a plethora of liquidity in the market.

“As a total return manager, we’re not trying to buy a bond and own it to maturity. We’re looking for an opportunity to swap out and pick up basis points on the way to a different bond,” said James Barnes, a senior fixed-income manager at National Penn Investors Trust. The firm has $1 billion in fixed income assets.

“Now, people are more total return oriented, so you’ll see less of the typical buy-and-hold to maturity bond investor and more appetite for liquidity in the bond markets, especially within the investment-grade, corporate bond area,” he continued. “As a result, over the last one or two months, you’ve seen a lot more liquidity in the market as people are both demanding more and offering more liquidity to the markets.”

The fixed income market has also become one of chasing yield for most investors. Barnes told Markets Media that most opportunities can be found “extending out on the yield curve, and moving down in credit quality, generally speaking.”

When it comes to trading, equities have particularly been revamped by a shift from human-based to electronically-based transactions. Will fixed income follow a similar path? Barnes thinks not.

“We benefit from electronic technological advancements that give us the best price and best execution,” he noted. “But, we also benefit from different brokers knowing the different levels of what’s out there….I honestly haven’t seen a pattern one way of the other (voice versus electronic), but I do believe there’s a comfort from doing trades via the phone. There’s a comfort with talking to people and executing trades through our sales force.”

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