By John Gallagher, MarketAxess
Last year, the markets were a one-way trade. Aggressive rate increases leading to horrible returns. Sell everything! And ask questions later… In the first quarter this year, it was the exact opposite. Now, everyone is chasing bonds. Especially New Issues. After a dismal 2022, at 6% yields, fixed income is suddenly sexy again. There are huge inflows into the market.
Of course, it’s pointless to try to predict the future. (Did you see SVB and other banks’ issues coming?) But it helps to be prepared. At MarketAxess, we see everything that goes on in the platform—both sides of the trade, including what doesn’t trade. And after a dip in liquidity due to the crisis, we’re seeing a strong rebound.
Our platform is a unique point of view, a global one that stretches back past an entire generation of traders. In other words, even after a decade of positive returns, when things went badly last year, we’d seen the worst of it all before.
But something that struck me recently was the appetite for US IG corporates in Asia, including Japan. To quote one trader I spoke with, “I can’t sell them enough Walmart bonds. They love Walmart at 5%!” This trend is happening in Europe, too. In response to conversations with clients, we’ve built technology to meet demand like this by making it easy to trade IG on dollar price.
What I’ve also discovered when talking with clients is a tale of two markets. On the one hand, at MarketAxess we’re experiencing strong trading volumes and tremendous liquidity—with new highs coming from dealers on Open Trading and also dealers proactively taking liquidity. Our execution rates are at record levels., HY dealer RFQs & Hybrid trading have also reached new peaks. Ticket sizes are increasing, to where blocks average sizes are now ranging around $10.1M for trades above $5M, but more importantly, trades above $10mm are now averaging $16.3mm —in comparison with the average block size on TRACE of $11.4M.
But for many clients, that’s simply not the case. They complain of a lack of liquidity. A continuation of last year’s liquidity horror story.
So, why is that? In my mind, it comes down to how you approach the market. When there is huge change in the marketplace, you need the right tools to take advantage of it, whether it’s inflows or outflows. From RFQ to Portfolio Trading to Live Markets, there’s an array of protocols to suit every condition. But before you pick up those tools, you must have confidence they’re going to work. It’s a chicken and egg situation: Only by using the tools do you get comfortable with them.
One thing I tell traders and is, “I’m going to give you a salesperson. But that ‘person’ isn’t going to call you.” Instead, I set up their portfolio ‘watchlists’ based on trade sizes of $3M or greater. Their new ‘salesperson’ is a thing called the MarketAxess Popup. And it alerts them: “You own this. Do you want to bid for the $5M?” Or, “There’s $10M in for the offer.” “Do you want to sell?” All real-time information affecting their portfolio and potentially returns. It means they can make a decision instantly. They’re no longer chasing the market. They’re in it.
Nobody wants another call. And it literally costs you nothing to listen to the market. If you decide to act, with Open Trading it’s anonymous. Nobody even knows what you’re doing. You can buy or sell 500 million bonds, and nobody would know the difference.
When there’s so much going on in the marketplace, not fully participating is the greatest risk. With the right technology at hand, there isn’t anything that should be holding traders and PMs back.
©Markets Media Europe 2023
