The macro environment is having a major effect on the attractiveness of certain instruments, noted Sonali Pier, managing director and portfolio manager at PIMCO, but also on trading.
Speaking at the plenary session of the Fixed Income Leaders Summit in Nashville, she said,
“We’ve had a lot less issuance in corporate markets, which has emphasised the secondary market as we look ahead and see the potential for a recession, even if it’s a shallow one. I think it also has brought back a lot of importance on the secondary market, because as interest rates have risen so precipitously it’s been difficult for some securities issuers, like in high yield, to refinance.”
Gregory Peters, co-chief investment officer at PGIM Fixed Income, said dispersion is a key market theme, as the Fed is no longer the dominant buyer in fixed income markets. “That’s good news for active investors because you can finally create alpha via differentiation,” he said.
Peters said fixed income market structure is much improved compared with five years ago, largely driven by the “ETF chassis” that drives trading. However, he noted that can turn on a dime.
“Liquidity is great until you need it,” he said. “We’re in a much better place, but my experience is that it’s great until it’s not great.”
Pier said tools and technology are better enabling liquid bonds and loans to trade in a cost-efficient manner, but voice trading will retain its utility for less liquid bonds and in more volatile markets.
Regarding key skills for new hires, Peters cited flexibility and critical thinking, as well as coding, or “the ability to take data and do something with it.”
Pier concurred but also said old-fashioned communication and relationship skills will remain important. The two disagreed on the timeframe for the evolution of market electronification.
“I think we’re on this precipice to the point where the fixed income market in four to five years time will look radically different to how it looks today,” Peters said.
Speaking just hours after the Bank of England unexpectedly raised its benchmark interest rate by a half percentage point, Daniel Veiner, co-global head of trading at BlackRock, reiterated his firm’s stance that higher rates will be around for a while. “Higher rates are not fleeting,” Veiner said on Thursday morning.
Citing the BOE move and factors such as sticky inflation in the service sector, Veiner said the Federal Reserve’s hands are tied, the ‘Fed put’ – the notion that the US Federal Reserve will backstop the stock market by lowering rates – is no longer there, and engineering a soft landing is a narrower needle to thread.
Regarding trading desk operations, Veiner said new technologies such as generative artificial intelligence are buzzworthy, but fixed income market operators and participants should first focus on leveraging the technologies that are proven in reducing trading friction.
“A lot of things shouldn’t be ‘blockchained’ or ‘AI’d, but they should be automated, optimized and standardized,” Veiner said, adding the goal is to “make sure the ecosystem evolves so we can transact at scale in a more efficient way.”
This can be best achieved by increasing sophistication around existing tools, analytics, and connectivity, he said.
MarketAxess is using data first and foremost to help market participants trade more efficiently, said Chris Concannon, CEO of the trading platform operator.
Concannon said MarketAxess is investing lots to uncrack the “tons” of data, which includes both executed trades and trade orders that are not executed. That information can help market participants determine what to trade, when to trade, and how much to trade.
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