IFR 03.7.2020

6 International Financing Review March 7 2020

Top news

Coronavirus is greatest test yet of

bond market liquidity

„ People & Markets Record trading volumes, but liquidity concerns persist

BY CHRISTOPHER WHITTALL,

HELENE DURAND

Regulators have long warned of

the dangers the corporate bond

MARKETûCOULDûPOSEûTOûlNANCIALû

STABILITYûINûTIMESûOFûMARKETûSTRESSû

3OûFARûTHEûRISKSûHAVEûBEENûLARGELYû

theoretical rather than real. But

the coronavirus-induced slump in

credit markets will now provide a

comprehensive test of how bond

investors can navigate such

STORMSûINûPOST

lNANCIALûCRISISû

trading conditions.

4HEûLASTûWEEKûOFû&EBRUARYûSAWû

THEûSHARPESTûSELL

OFFûINûHIGH

YIELDû

CREDITûINûNEARLYûAûDECADEû

ACCOMPANIEDûBYûRECORDûTRADINGû

volumes, as investors reacted to

the potential damage the novel

coronavirus will do to the world

ECONOMY

Markets managed to weather the

lRSTûLURCHûLOWERûWITHOUTûANYû

indication of a self-reinforcing spiral

OFûlREûSALESûDESPITEûINVESTORSû

pulling billions of dollars out of

corporate bond funds. Instead, data

showed record trading volumes in

53ûHIGH

YIELDûCORPORATEûBONDSû

credit default swaps and exchange-

traded funds as debt markets

adjusted to the uncertain outlook.

But there were increasing signs

OFûMARKETûFRAGILITYûONû&RIDAYû

following another massive round of

FUNDûOUTmOWSûWITHûTHEû%UROPEANû

HIGH

YIELDû#$3ûINDEXûI4RAXXû

Crossover jumping to its highest

level since mid -2016.

Such large bond fund

redemptions coupled with ongoing

WORRIESûOVERûTHEûVIRUSSûIMPACTûWILLû

be the sternest test to-date of the

resilience of the multi-trillion dollar

corporate bond market.

h4HEûTAILûRISKûISûIFûAûLARGEûFUNDû

manager has to gate,” said John

'OUSIASûHEADûOFûmOWûCREDITû

trading for EMEA at Nomura,

referring to the process in which

asset managers bar withdrawals

FROMûTHEIRûFUNDSûh)FûSOMEONEûBIGû

GATESûITLLûBEûLIKEûWHENûTHEûlRSTû

MONEYûMARKETûFUNDûBROKEûTHEû

buck. People are forced to sell,

THEYûDONTûCAREûABOUTûTHEûPRICEv

h)FûEVERYONEûSUDDENLYûNEEDSûTOû

raise cash levels, it creates a sell-off

INûRISKYûASSETSûTHATûCOULDûCOMPOUNDû

ITSELFû)TSûAûSNOWBALLûTHATûTURNSûINTOû

an avalanche,” he said.

PRESSURE POINT

The US Federal Reserve and the

Bank of England are among the

regulators that have highlighted

BONDûMARKETûLIQUIDITYûnûTHEûEASEûOFû

BUYINGûANDûSELLINGûSECURITIESûINû

DECENTûSIZEûnûASûAûPOTENTIALûPRESSUREû

POINTûINûlNANCIALûMARKETS

That is against the backdrop of

the astronomical growth of asset

managers and corporate bond

markets over the past decade,

coupled with the decline in risk

appetite from bank trading desks.

The International Capital Market

Association released a report last

WEEKûTHATûFOUNDûLIQUIDITYûINûTHEû

ROUGHLYûõTRNû%UROPEANû

investment-grade debt market has

DETERIORATEDûSINCEûTHEûTRADEûBODYSû

LASTûSTUDYûFOURûYEARSûAGOûANDûCALLEDû

ONûPOLICYMAKERSûANDûTHEûINDUSTRYû

to act to arrest the decline.

0OLICYMAKERSûWORRYûINû

particular about what would

happen if asset managers

OFFERINGûINVESTORSûDAILYûACCESSûTOû

THEIRûMONEYûHAVEûTOûGATEûFUNDSû

BECAUSEûTHEYûAREûUNABLEûTOûSELLû

corporate bonds fast enough to

meet redemption requests.

4HEREûHAVEûALREADYûBEENûNOTABLEû

OUTmOWSûFROMûBONDûFUNDSûANDû

ETFs, which could explain the

speed of recent price swings,

ANALYSTSûSAYû'LOBALûHIGH

YIELDûCREDITû

SPREADSûWIDENEDûBYûBPûTOûJUSTû

below 500bp in the last week of

&EBRUARYûACCORDINGûTOû&EDERATEDû

(ERMESûANDû)#%ûBONDûINDICESûnûTHEû

biggest jump since 2011.

h)ûEXPECTûWELLûSEEûSOMEûBIGû

REDEMPTIONSûONûTHEûBACKûOFû;THAT=û

bad performance, and this is

WHENûYOUûlNDûOUTûWHATûTHEûREALû

value of these assets is,” said Mike

2IDDELLûHEADûOFû5+ûlXEDûINCOMEû

at Allianz Global Investors.

Investors pulled US$16.1bn out

OFûINVESTMENT

GRADEûHIGH

YIELDû

and emerging-market debt funds

in the week ended March 4, the

SECONDûHIGHESTûOUTmOWûONûRECORDû

according to Bank of America. That

FOLLOWEDû53BNûDRAININGûOUTûOFû

HIGH

YIELDûDEBTûFUNDSûINûTHEû

PREVIOUSûWEEKLYûPERIODûTHEûTHIRDû

LARGESTûOUTmOWûEVER

Portfolio trading gains traction in high-yield

„ Bonds Growing ETF market has sparked increase in basket trades

BY MILUSKA BERROSPI

The growth of portfolio trading

INûHIGH

YIELDûBONDSûHASûCOMEû

into focus in recent weeks amid

HEAVYûTURNOVERûINûTHEûWIDERû

credit market, as investors

SCRAMBLEûFORûWAYSûTOûSHIFTû

positions during the sharp sell-

off in corporate bonds.

!SûMANYûASûHALFûOFûINVESTORSû

across investment-grade and

HIGH

YIELDûCORPORATEûBONDû

markets are now using portfolio

TRADINGûINûSOMEûCAPACITYûTOûBUYû

and sell large baskets of bonds,

INDUSTRYûEXECUTIVESûESTIMATEû

helping portfolio trading

volumes more than double in



7HILEûTHEûMAJORITYûOFûTHATû

ACTIVITYûHASûBEENûCONCENTRATEDû

in investment-grade bonds until

NOWûMARKETûPARTICIPANTSûSAYû

demand for portfolio trading has

BEENûINCREASINGûINûTHEûHIGH

YIELDû

MARKETûPARTICULARLYûDURINGûTHEû

recent slump in bond prices.

Investors have pulled more than

53BNûOUTûOFûHIGH

YIELDûDEBTû

funds over the past two weeks,

according to Lipper, after high-

YIELDûBONDSûRECORDEDûTHEIRûWORSTû

WEEKLYûSELL

OFFûINûNEARLYûAûDECADE

0ORTFOLIOûTRADINGûACTIVITYûHASû

also increased in line with higher

trading volumes in the broader

corporate bond market,

EXECUTIVESûSAYûPROVIDINGûANOTHERû

avenue for investors needing to

BUYûANDûSELLûSECURITIESûDURINGû

these volatile times.

h)ûWASNTûSURPRISEDûTHATûTHEREû

were a lot of people out there that

wanted to do portfolio trades

;DURINGûTHEûSELL

OFF =vûSAIDû*EFFû*ONESû

head of trading in North America

for Aviva Investors.

h)ûWASûMAYBEûAûLITTLEûBITûMOREû

SURPRISEDûATûHOWûMANYûWEREû

ACTUALLYûEXECUTEDûTHEûSIZEûOFûTHEû

trades, and how willing the sell-

side was to accommodate them

at aggressive prices.”

Portfolio trades give investors a

WAYûOFûBUYINGûORûSELLINGûLARGEû

baskets of different corporate

bonds in one go, rather than

having to exchange securities one

at a time. That has given investors

ANOTHERûWAYûOFûACCESSINGûLIQUIDITYû

INûAûMARKETûINûWHICHûONLYûAûSMALLû

FRACTIONûOFûBONDSûTRADEûFREQUENTLYû

and in decent size.

MORE THAN DOUBLE

Portfolio trading volumes

SWELLEDûTOû53BNûINûTHEûlRSTû

NINEûMONTHSûOFûLASTûYEARûMOREû

than double the entire amount

that was transacted the previous

YEARûACCORDINGûTOûAû-ORGANû

3TANLEYûRESEARCHûNOTEûFROMûLASTû

October.

Despite its fast growth,

portfolio trading remains small

in comparison with the wider

corporate bond market,

ACCOUNTINGûFORûONLYûûOFûALLû

trading volumes in investment-

GRADEûANDûHIGH

YIELDûDURINGûTHATû

time, the report said.

4 IFR Top news 2323 .p 4 - 14 .indd 6 06 / 03 / 2020 19 : 26 : 34