TABB Group says the US Corporate Bond market is at the center of a whirlwind storm, an evolving bond market ecosystem with the buy side in the eye of that storm.
In “Corporate Bond Market Evolution: The Center of Gravity Shift”, written by George Bollenbacher, head of fixed income research, and fixed income analyst Colby Jenkins, TABB Group examines the extent to which strategies, trading activity and client services have changed over the past several years in response to the proliferation of electronic credit trading venues and external market forces.
“We also examined the liquidity issues facing participants engaged in trading corporate bonds electronically and the steps trading venues are taking to address the issues,” says Jenkins. But, he adds, “For years, bond research, including TABB Group’s statistics and regulations, assumed those three main segments were immutable. However, evolution is afoot in the corporate bond market, so things may be changing before our eyes.”
To make sense of these changes, the co-authors first looked at the taxable bond market as a whole, then the corporate bond market in detail because all of these market segments are competing for the same investment dollars, generally the tax-sheltered savings of individuals, either accumulated independently or as part of an organizational retirement system. Those savings have accumulated at a fairly regular pace, so many of the ups and downs in the taxable bond market are a result of supply fluctuation, not demand fluctuation.
ATS Volumes for All Corporate Bonds
“By scrutinizing corporate bond market statistics,” says Bollenbacher, “we focused on two activities, issuance and secondary trading, and learned first that the center of gravity has gradually moved down the quality spectrum. Based on our analysis of the data,
it looks as if most of the growth came in the issuance spectrum, particularly since there were so few issues in the AA and AAA sectors.
Second, the quality spectrum shift does not appear to have affected trading volumes. Our analysis leads us to believe that liquidity viewed across the quality range of the corporate bond market has not declined at all since at least 2007.”
In talking to the major electronic corporate bond venues about the ongoing evolution of the market, Jenkins says they pinpointed four key indicators about the future of the US corporate bond market: there are several drivers in the movement to an electronic venue by the buy side; venues are beginning to see basket, or portfolio, trading; best execution requirements on asset managers have begun to surface; and there is the illiquid segment of the market.
While it may be inviting to project all of the current trends into the foreseeable future, TABB believes that to understand the forces of market evolution, it was essential to revisit long- and short-term forces at work in market evolution: long term, the march of technology and compression of fees and spreads; and short-term, forces that may be near the end of their life are very low interest rate volatility and the introduction of new market regulations.
In a volatility-enhancing scenario, for example, Bollenbacher says that volatility will render market-making more profitable again, growing the ranks of market-makers, albeit over a period of years, a sequence creating somewhat difficult times for the buy side, particularly coupled with cost pressures and performance demands, making the buy side a fertile market for any liquidity-enhancing technology solutions. “Who would be providing those solutions may be one of the great questions for the corporate bond market over the next several years.”
“Corporate Bond Market Evolution: The Center of Gravity Shift” with 14 highly statistical exhibits is available for download by TABB fixed income and corporate bond clients as well as pre-qualified media at https://research.tabbgroup.com/search/grid. For more information or to purchase the research note, write to info@tabbgroup.com.
