As investors look to lock in higher yields ahead of Fed cuts, dealer net positions in IG corporate bonds of more than five years have dropped.
Primary dealers are short US$3.8 billion here, Coalition Greenwich reported, down 352% YoY. A negative inventory could lead to dealers widening spreads or extending execution times, the report said.
Kevin McPartland, head of research for market structure and technology at Coalition Greenwich, commented:“Time will tell if this shift to short positions is sticky. […] It is possible that Q4 is a blip driven by short-term positioning. Regardless, our research continues to point to a corporate bond market that is agency (or at most, riskless principal), which translates into a market where primary dealer bond holdings are less impactful on market liquidity than they once were.”
Average daily notional volumes in the corporate bond market were up 26% year-on-year (YoY) in October, reaching US$49 billion. On a year-to-date basis, ADNV rose by 21% to US$47 billion.
In contrast to US Treasuries, dealers are seeing strong revenues in the credit market. Coalition Greenwich estimated that revenues were up 16% YoY in Q3, reaching US$3.9 billion.
READ MORE: October sees record US Treasury volumes
E-trading in both IG and HY bonds fell by one percentage point YoY, the former taking 46% of the market and the latter 32%.
Portfolio trading accounted for 10% of total market volume in October (US$4.9 billion of daily volume), with 85% by notional volume executed via trading venues. Although manual trading is used less often, their notional size can reach into the billions, Coalition Greenwich stated.
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