Corporate-Bond Liquidity Vexes Buy Side

Terry Flanagan

Asset managers are waiting for an electronic corporate bond-trading platform for large trades and illiquid paper amid markedly reduced bond portfolios at big banks.

Christine Kenny, senior fixed income strategist, Loomis Sayles Investments said the electronic market will exist alongside with the traditional voice market which is unlikely to ever fully go away.

She told Markets Media: “I have personally not seen a trading platform which addresses the real concerns of larger sizes and highly illiquid paper. There are projects underway focusing on aggregating information flow which could be helpful in giving a consolidated picture of where liquidity might be found.”

For example, one of these projects is Algomi, which builds internal social networks for banks to become more effective fixed-income brokers.

“The corporate bond market is not liquid regardless of the currency, there are just different degrees of illiquidity,” she added. “Expectations have to be managed so where previously the portfolio could buy or sell a position in a day or two, it might now take a week or two.”

Kenny is on the fixed income trading panel at Markets Media’s Global Markets Summit London on October 16.

Consultancy Greyspark Partners said in its Trends in Fixed Income Trading report in June that the liquidity imbalance has become acute for the 3,000 to 4,000 corporate bonds that make up tail end of the market.

Greyspark forecast that between 20% to 25% of corporate bonds will be traded electronically this year, the same as last year, and a voice element for dealing will remain for the foreseeable future as independent bond platforms try to gain share.

Fabien Orève, global head of trading at Candriam Investors Group, suggested that as banks have reduced their bond inventories, they will either need to specialise in specific fixed-income segments or move to a mix of agency and principal trading.

Orève told Markets Media in August: “It is a challenge to find an opposite order to trade in the same bond and at the same time, and the banks that will be the winners are those teams who can alert us about any alternative investments in very correlated credits.”

He also suggested that the European market implement a system for public reporting in the corporate debt market similar to the Trace platform in the US.

Another solution to improve liquidity could be for asset managers to use their bond portfolios more actively but Kenny said this would be difficult.

“Traditional buy-side firms now hold larger amounts of bonds than the sell side, but their business models would have to change completely for them to use their portfolio to become true providers of liquidity,” she added.

Kenny suggested that the buy side may start recruiting traders with a different set of skills.

“More of the buy side may have to start looking for the type of traders who are able to be more involved in the conversation around trading and have freedom around execution” rather than those who are told what to trade and at what level, she said.

Featured image via tadamichi/Dollar Photo Club

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