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Colliding forces are reshaping the US fixed-income markets, according to TABB Group in new research, “US Fixed Income Trends: 2012 State of the Industry.” But bond market liquidity risk is seen as a primary concern, reports Henry Chien, a New York-based TABB research analyst who co-authored the report with contributing analyst Deepali Nigan.
With new liquidity pools emerging, electronic volumes at 22% of the cash market and asset managers and exchange traded fund (ETF) market makers finding their odd-lot trade destination in alternative trading systems (ATSs), the line between institutional and retail is blurring as comingled flows make for attractive pools of liquidity for many participants.
“Electronic is no longer a voice equivalent on the screen,” Chien says. “Innovative protocols and new order-flow networks have a place in this new fixed-income universe as many asset managers and ETF market makers are finding it more efficient to execute their odd-lot sized trades across ATSs.”
According to Chien, quantitative easing (QE) reduced trading revenues and bank regulations are colliding forces fundamentally reshaping the fixed-income markets. “The old business model of dealers holding bond inventory is dead. New platforms and products in today’s credit bubble are driving new liquidity dynamics.”
In spite of a low interest rate environment driven by rounds of quantitative easing, dealers have reduced corporate securities inventory by 40% from 2008, unlike what they did in the past when they levered up. At the same time, Nigan points out, the corporate bond market has grown by nearly 40% in notional outstanding during the same period.
Findings from the report include:
- Trends in asset allocation favor US markets: US bond funds saw over $150 billion in cumulative flows in 2012 with issuance in the primary market at an all-time high in 2012.
- New venues for secondary market liquidity are growing rapidly: electronic volume is now 22% of customer volume, concentrated in RFQ protocol trading systems; ATS and block- trading networks look to expand and further grow electronic volumes.
- Evolution of the secondary market is evident: new liquidity dynamics in corporate bond markets are already having an impact; overall turnover has declined, trade sizes are down and odd-lot volumes are up.
- Multi-dealer trading platforms are on the rise as ATS volume now account for 14% of trading the entire secondary market for corporate bonds.
- The market for credit-related derivatives is shifting away from OTC products: single name CDS average daily gross notional volume is down 20% 2012 YTD from 2011; index CDS is up by 5% at $42B in notional ADV.
- ETFs on credit markets are growing: exchange average daily notional turnover is 57%, now $860m in notional ADV; underlying bond turnover is up 72%, now $230m in notional ADV.
The Executive Summary for this 19-page report with 20 exhibits is available now for download by TABB Group Research Alliance Fixed Income clients and qualified media at www.tabbgroup.com. For more information or to order the report, write to info@tabbgroup.com.
Percentage of Customer Par Volume by Trade Type and Electronic Venue
Quarterly Odd Lot Volume as a Percentage of Total Par Volume
Annual Corporate Bond Turnover, Market Size and Par Volumes (US$ B)
