05.03.2012
By Terry Flanagan

ING Looks Abroad for Bond Returns (Part 5)

This is the fifth of a six-part series profiling ING Investment Management’s bond business.

Bond trading can be more challenging now compared with five years ago when liquidity was essentially free, according to Christine Hurtsellers, CFA, chief investment officer of the fixed income and proprietary investments for ING, who plans to run this year’s Chicago and New York marathons.

“In dealing with a world of higher-cost liquidity, we spend quite a bit of time analyzing forward-looking asset allocation changes and trades, so we’ve had to incorporate higher bid-asks in that dialogue,” she said. “It’s a lot harder to navigate out of things ahead of the market.”

Specifically, ING is steering clear of CCC-rated debt, the lowest non-defaulted grade in high yield. Companies with that rating will find it hard to survive amid weak economic growth, and their bonds have become more illiquid, Hurtsellers said.

ING grooms its traders to be experts in their specific areas rather than generalists. “We are not believers in the collective trading desk model, where there’s a trader that will trade currencies, or securitize credit, or investigate a high-yield credit as a centralized function,” Matt Toms, CFA, head of U.S. public fixed income at ING said. “We think you can keep costs lower by putting that trade in an OTC market in the hands of a sector specialist.”

Given the interconnectedness of fixed-income markets, ING’s sector specialists are not siloed; rather, regular cross-pollination is encouraged. Investment-grade traders, for instance, need to know what is happening in the subprime debt market, because investment-grade banks that hold subprime debt will be affected by moves in those securities.

“You want different teams to talk as much as possible,” Toms said. “It’s key to keep the lines of communication across the desks as open as possible, so that unique insights can be shared.”

In Toms’ view, ‘mega’-sized corporate-bond deals can be traded electronically, but beyond that he is not bullish on the prospect for expanding electronic trading much beyond Treasuries, currencies and some agency securities.

“This is a lot like fiscal reform — it’s talked about an awful lot, but it isn’t practiced a whole lot,” Toms said. “Some of that is because the motivation to change is not very strong for the vested interests within the fixed-income markets, both from the buy side and the sell side.”

“The sell side has a lot of high-quality people, careers and franchises that are built upon trading fixed-income markets in the way that’s existed for many years,” Toms continued. “On the buy side, while people want to have more transparency and lower trading costs, those firms that have built strong relationships with the sell side also have a preferred position at the table, if you will, as far as being able to navigate the fixed-income trading markets.”

Little has changed with regard to how credit-default swaps and other derivatives trade, even with a regulatory push and massive media attention since 2007, Toms noted.

It makes sense for bonds of $1 billion and above issued by household names such as Goldman Sachs, General Electric, and JPMorgan Chase to trade electronically, Toms noted. More clarity and transparency in the pricing of such benchmark bonds should lead to “less inefficient” OTC markets in smaller issues of the same issuer, as well as big issues of comparable issuers.

Toms, an avid golfer who joined ING from Calamos Investments, contrasted the largest and most liquid corporate bonds with a $250 million, 30-year utility issue that might trade once every two years.

“Nobody is going to make a living actively quoting or trying to trade that bond,” Toms said. “It’s the same with a lot of segments of the structured securitized market, be it CMBS, non-agency mortgage, or mortgage derivatives. These are small instruments that probably need the care, time and attention of an OTC market.”

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