International Financing Review March 7 2020 7For daily news stories
@ visit http://www.ifre.comMeanwhile, almost US$2bn
WASûPULLEDûOUTûOFû53ûHIGH
YIELDû
%4&SûONû&EBRUARYûûALONE û
ACCORDINGûTOû$EUTSCHEû"ANKûnû
another record.
4HEREûWASûALSOûAûhSTEADILYû
worsening picture” in Europe,
WHEREûOUTmOWSûHAVEûBEENûLOWERû
so far, European credit strategists
at JP Morgan said in a research
note, with mutual funds starting
TOûFEELûhTHEûRISK
OFFûSENTIMENTû
prevalent in the market”.
*OHNû4AYLOR ûCO
HEADûOFû
%UROPEANûlXEDûINCOMEûATû
!LLIANCEû"ERNSTEIN ûSAIDûh%4&Sû
ORûMUTUALûFUNDSûOWNERSHIPûOFû
credit markets is high relative to
HISTORYûANDûYOUûEFFECTIVELYûBECOMEûAûFORCEDûBUYERûORûFORCEDû
SELLERûIFûYOUûGETûYOURûINmOWSûORû
OUTmOWSû4HATûCREATESûINûITSELFû
MOREûVOLATILITYv
h4HATûPASSIVEûRISK
TYPEû
PORTFOLIOûISûAûSOURCEûOFûVOLATILITYû
at what can be the worst time,
ASûYOUûTENDûTOûSEEûINVESTORSûUSEû
those products to hit the panic
button and that exacerbates sell-
offs.”RECORD VOLUMES
One encouraging sign for
investors was the bumper
trading volumes that
accompanied the sell-off,
suggesting the market managed
TOûWITHSTANDûTHEûlRSTûWAVEûOFû
selling.4HEûLASTûWEEKûOFû&EBRUARYûWASû
COMFORTABLYûTHEûBUSIESTûWEEKûINû
53ûHIGH
YIELDûTRADINGûVOLUMESû
on record, with around
53BNûCHANGINGûHANDS û
according to market data going
BACKûTOûTHEûSTARTûOFûû
PROVIDEDûBYûTRADINGûPLATFORMû
MarketAxess.
Trading data also showed how
CDS and ETFs have become
INCREASINGLYûPROMINENTûINûDRIVINGû
prices in the wider market.
4HEûlNALûWEEKûOFû&EBRUARYû
WASûBYûFARûTHEûBUSIESTûWEEKûEVERû
INû#$3ûTRADINGûnûWITHûNEARLYû
US$600bn in volumes,
according to data from the
International Swaps and
Derivatives Association going
back to the start of 2013.
Elsewhere, BlackRock said
GROSSûmOWSûINûITSû%UROPEANûHIGH
YIELDû%4&SûGREWûûINûTHEûLASTû
WEEKûOFû&EBRUARYû/NEû%UROPEANû
BANKERûSAIDûTHEûh%4&ûSELLINGû
pressure was incredible”, with
his bank receiving well over half
a billion euros of sell enquiries
ONûONEûDAYûTHATûWEEK
Electronic bond-trading
platforms also registered
notable upticks, with
MarketAxess and Tradeweb
both reporting record credit
trading volumes in the last
week of the month. Elsewhere,
Liquidnet, a platform focusedMAINLYûONûTRADINGûLARGEûBLOCKSû
of bonds, said its volumes that
week were double the average
SOûFARûTHISûYEAR
h4HERESûAûGAPûWHENûITûCOMESû
TOûLIQUIDITYûPROVISIONûFROMû
TRADITIONALûSOURCES ûESPECIALLYû
around blocks and less liquid
securities,” said Constantinos
!NTONIADES û,IQUIDNETSûGLOBALû
HEADûOFûlXEDûINCOME
%VENûSO ûINVESTORSûSAYûTRADINGû
bonds has still been challenging
REGARDLESSûOFûWHETHERûYOUûAREû
BUYINGûORûSELLING
h)TSûTRICKYûTOûBUY ûEVENûONû
DOWNûDAYS vûONEûHIGH
YIELDû
INVESTORûSAIDûh4HERESû
dislocation, but also a lack of
willingness to trade.”
That could be a positive sign
that investors are not being
OVERWHELMEDûBYûOUTmOWS û
though some traders worried
that the sharp market moves on
&RIDAYûCOULDûBEûSIGNSûOFûBROADERû
capitulation.
h4HEûTRADERûCOMMUNITYûINû
credit is smaller than it used to
BEû.OWûITSûMOREûOFûAûREALû
MONEY û%4&ûPRODUCT vûSAIDû
.OMURASû'OUSIASûh4HEû#)/ûHASû
to give an edict to sell. It takes
TIMEû%VERYûTIMEûTHEûMARKETSû
stabilise, the pressure to make
big changes dissipates.”
Additional reporting by Sudip RoySource: MarketAxess, TRACE and Eleanor Duncan (^)
0
10
20
30
40
50
60
70
80
1/1/181/3/181/5/181/7/181/9/181/11/181/1/191/3/191/5/191/7/191/9/191/11/191/1/
US$bn
US HIGH-YIELD WEEKLY
TRADING VOLUMES
Source: ISDA
800
600
400
200
0
1/1/191/3/191/5/191/7/191/9/191/11/191/1/201/3/
US$bn
WEEKLY CDS TRADING VOLUMES
The growth of portfolio trading
has come hand-in-hand with the
RISEûOFûlXED
INCOMEûEXCHANGE
traded funds. The increase in size
ANDûLIQUIDITYûINûTHEûCREDITû%4&û
market has made it easier for bank
trading desks to price big baskets
of bonds, making reference points
and hedges more available.
h7EûSAWûTHEûBENElTSûTHATû
portfolio trading can offer from
AûSPEEDûANDûEFlCIENCYû
perspective for large scale,
multiple line-item orders,” said
Jones at Aviva Investors, which
started using portfolio trading
ONûITSûHIGH
YIELDûDESKûINûEARLYû
h7HATûMAYûHAVEûTAKENûDAYSûORû
weeks to accomplish, we can
PRETTYûMUCHûACCOMPLISHûINûJUSTûAû
few hours now,” he said.
Portfolio trading has been
SLOWERûTOûCATCHûONûINûTHEûHIGH
YIELDû
market, with investment-grade
bonds accounting for 63% of traded
VOLUMEûLASTûYEAR û-ORGANû3TANLEYû
SAIDû4HATSûPERHAPSûNOTûSURPRISINGû
given the higher proportion of
illiquid, volatile securities in the
HIGH
YIELDûMARKET
/NûAûTYPICALûDAYûUPûTOûûOFû
HIGH
YIELDûBONDSûAREûUNLIKELYûTOû
trade, and those that do are small
in size, market sources estimate.
/NLYûAROUNDûûOFûTHEûTRADESûINû
the market are sized at more than
US$1m, said one trader.
h4HEREûAREûCHALLENGESûINûTERMSû
OFûTRADINGûWHENûLIQUIDITYûGETSûDRYû
INûHIGH
YIELDûnûYOUûCANûSEEûAIRû
pockets and bigger gap moves and
THEûBID
ASKûREALLYûWIDENSûOUT vûSAIDû
$ANû6EINER ûGLOBALûHEADûOFûlXED
income trading at BlackRock.
h)TûISûACTUALLYûOPERATIONALLYû
EASIERûTOûNEGOTIATEûAûVERYûLARGEû
basket of IG bonds that are on
spread levels,” he added, noting
THATûHIGH
YIELDûBONDSûTRADEûMOSTLYû
on price rather than spreads.
Some believe those
characteristics could make it harder
TOûEXECUTEûHIGH
YIELDûPORTFOLIOû
TRADESûDURINGûCHOPPYûMARKETSû/NEû
of the main selling points for
INVESTORSûnûOFmOADINGûLESSûLIQUIDûORû
UNWANTEDûBONDSûnûCOULDûPROVEûAû
sticking point for banks on the
other side of the trade.
h4HINGSûLIKEûPORTFOLIOûTRADINGû
ONLYûWORKûWHENûVOLATILITYûISûLOWû
and correlations are high,” said
*OHNû'OUSIAS ûHEADûOFûmOWûCREDITû
trading for EMEA at Nomura.
h7HENûVOLATILITYûISûHIGHERûANDû
YOUûGETûDISPERSION ûITSûVERYûHARDû
to trade a portfolio against ETFs.
You might get 10 bonds of an
AIRLINEûORûAûCREDITûYOUûDONTû
want.”
MACHINE LEARNING
In an effort to address this,
companies such as Tradeweb are
using alternative methods such
as machine learning to estimate
POTENTIALûBONDûPRICES ûESPECIALLYû
for illiquid securities.
h)TSûHARDERûTOûPRICEûHIGH
YIELDû
BONDSûANDûSOûWEVEûSEENû
increased pricing from
algorithmic market-makers, and
SYSTEMATICûMARKET
MAKERS ûANDû
investments in pricing from
people like ourselves,” said Chris
Bruner, head of US credit at
Tradeweb.
This could support more
portfolio trading in periods of
HEAVYûTRADING
h9OUûCANûSEEûTHISûINûTHEû
NUMBERSûnûTHEûMARKETûISûMOVINGû
BIGûVOLUMEûnûANDûPORTFOLIOû
TRADINGûISûAûWAYûTOûMOVEûBIGû
volume and big risk, and do so
DISCREETLY ûWITHûDEALERS vûSAIDû
Bruner.
Additional reporting by
Christopher Whittall
4 IFR Top news 2323 .p 4 - 14 .indd 7 06 / 03 / 2020 19 : 26 : 35