Bonds On The Rise in Canada

Terry Flanagan

While many market participants have been struggling in recent months amid depressed trading volumes, a resurgence in fixed income is providing a much needed boost for some—with one platform in Canada looking to profit from the situation.

Corporate bond trading platform operator MarketAxess is looking to capitalize on the growing trend in bond trading in Canada, recently receiving approval to operate its electronic venue in Quebec.

Across the border, U.S. fixed income trading was strong during the first quarter of this year, with total Trade Reporting and Compliance Engine (Trace) average daily volumes of $19.9 billion up 42% from the previous quarter and down slightly from the first quarter of 2011. High-yield trading was particularly strong in the first quarter, up 57% on the final quarter of last year and also 5% up on the first quarter a year earlier.

And ongoing fears about a European recession as well as the 27-nation bloc’s continuing credit issues have helped to keep a ceiling on the record lows in yields that the global bond market has experienced over the past few months, said Sal Guatieri, senior economist at financial services provider BMO Capital Markets in Toronto.

“The fixed income market will remain supported by occasional flare-ups by the European crisis, at least in the first half of the year,” Guatieri said.

During the first quarter, investor sentiment improved and risk appetite increased, while credit spreads and credit spread volatility declined. The improved market conditions led to record quarterly U.S. high-grade Trace volumes of $864 billion and healthy new issuance volumes of $254 billion for the first quarter of 2012.

Last year, U.S. fixed income exchange-traded fund assets were around $12 billion, up 43% from the past year, according to data from research firm Investor Economics. Canadian ETFs garnered $7.9 billion in new assets for the same time period with $3.3 billion into fixed income, showing a cross-border trend.

MarketAxess has been operating in Ontario since 2008. Because it had already been operating in Canada for a number of years, the process for it to acquire its license in Quebec took just a few months. Its operations in Canada consist primarily of offering the trading of high-yield U.S. corporate bonds and credit derivatives to Canadian investment managers.

“We had been operating in Canada for a few years; what we’ve done there is deliver our trading platform to customers in Canada looking to trade in the U.S. credit market,” said Kevin McPherson, head of sales for MarketAxess. “Electronic trading can help investors more easily source fixed income liquidity and improve trade execution. We’ve seen how investors benefit from increased transparency and efficiency through electronic execution. We have also identified significant, quantifiable cost savings when trading bonds electronically versus the phone.”

In addition to Canada, MarketAxess also has a substantial presence in Europe through its offices in London and in Asia. In early April, the company made its foray into South America when it opened an office in Sao Paulo, Brazil. The move was made to boost its presence in the nation, building upon a strong 2011, during which it traded some $9 billion in Brazilian debt.

The company will look to build its brand from the ground up as it enters each new market.

“As a U.S.-based company, any time you go into a new market with new customers you need to building your brand awareness,” said McPherson.

The trading platform netted record revenues of $50.7 million during the first quarter, up 16% from a year ago, with total trading volume also at a record $158 billion, up 17%. Its market share in U.S. high grade bonds is estimated at about 11.4%.

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