The Wall Street Journal - 28.10.2019

B10| Monday, October 28, 2019 THE WALL STREET JOURNAL.

RaceIsOn

For Future

Of Bond

Trading

Rivals challenge new

leader MarketAxess

Highyield

Investmentgrade

Electronic platform MarketAxess's share of U.S. bond trading

by dollar volume

Sources:MarketAxess;Finra

25

0

5

10

15

20

%

2015 ’16 ’17 ’18 ’19

HEARD

ON

THE

STREET

FINANCIAL ANALYSIS & COMMENTARY

Consumers’ expected inflation

rate over the next five to 10 years

Source: The University of Michigan

5

0

1

2

3

4

%

1991 2000 ’10 ’19

ments, has recently pared his

fund’s position in debt instru-

ments like bank loans and in-

vestment-grade collateralized

loan obligations. He has also

purchased equities tied to

emerging markets such as

China, Brazil, South Korea

and India.

A more optimistic view on

the trade talks between the

U.S. and China has been an im-

portant reason for his recent

moves, Mr. Redha said.

“It does seem to us that

we’ve probably passed the

peak of uncertainty and the

peak of escalation,” he said.

deal goes through.

Good economic news con-

tinues to be hard to come by,

especially outside the U.S.

Business activity in the euro-

zone was close to stagnation

in October, while it declined in

Japan, data showed last week,

suggesting that a wave of in-

terest-rate cuts by leading

central banks over recent

months has yet to turn around

a slowing global economy.

Still, some investors are

betting that the worst may be

over. Hani Redha, London-

based multiasset portfolio

manager at PineBridge Invest-

have suffered from worries

over weak demand and exces-

sive supply.

Few investors are abandon-

ing their haven holdings com-

pletely. Net bets on gold in fu-

tures markets remain near

recent highs, a testament to

how investors have come to

expect snags in both trade ne-

gotiations and Brexit.

Gold prices moved higher

and the pound fell against the

dollar on Thursday after Mr.

Johnson called for a snap gen-

eral election to take place on

Dec. 12, saying one was

needed to ensure his Brexit

based head of multiasset in-

vestments at Rathbone In-

vestment Management, has

started increasing his expo-

sure to U.K. stocks in recent

days, after years of limiting

his holdings due to concerns

over Brexit.

“That’s not an eyes-out, all-

on-red risk on but I’m feeling

more positive than I was a

week ago,” Mr. Coombs said.

Signs of market partici-

pants embracing risk more

broadly include a rally in

beaten-up emerging-market

stocks and a more recent up-

turn in copper and oil, which

even as they remain cautious

over slowing global growth, an

aging U.S. bull market and po-

tential reversals in tariff talks

or Brexit negotiations.

That includes the British

pound, which is up nearly 7%

from September’s multiyear

lows and has been one of the

world’s best performing cur-

rencies over the past few

weeks. The South Korean won,

which had been hurt by the

country’s reliance on China as

a market for its exports, is up

more than 8% against the dol-

lar in the past month.

David Coombs, London-

flation were part of the central

bank’s justification for cutting

rates this summer, and part of why

it will likely cut rates when it

meets next week.

Yet easy monetary policy doesn’t

seem to be enough to lead people

to expect higher inflation any

more. And low inflation isn’t just a

U.S. phenomenon, but something

that is occurring globally despite

easy monetary-policy stances

among central banks all over the

world. Moreover, if the global

growth and trade uncertainties the

Fed has been worrying about ease,

and the unemployment rate contin-

ues falling, cutting rates on the ba-

sis of low-inflation expectations

alone is probably a nonstarter.

The good news is that there is

reason to believe that inflation

readings will pick up in the months

ahead—especially as some of the

idiosyncratic factors that have

been pushing the Fed’s favored in-

flation measure lower fade. But for

inflation expectations to rise to the

point that the Fed isn’t worried

about them anymore, inflation may

need to go north of the central

bank’s 2% target and stay there.

The case for that happening is

iffy. —Justin Lahart

Wall Street has a new bond
king. But as always, there are
rivals for the crown.
Last week,MarketAxess
reported a 30% jump in revenue
and 40% jump in net income, both
ahead of expectations. The
company is in the business of
electronic bond trading, offering
venues and tools for banks,
investment managers and others
to trade corporates, munis and
other instruments without picking
up the phone.
Though stocks and currencies
have long gone the way of trading
automatically or by click-in
centralized marketplaces, about
70% of investment-grade bonds in
the U.S. and more than 80% of
high-yield bonds still trade much
more manually, through
conversations or ad hoc messages
between traders and dealers,
according to Greenwich Associates.
The nearly universal expectation
is that this share will drop
precipitously over the years to
come as electronification of bond
trading gains ground.
That gives MarketAxess, by far
the biggest of a handful of
electronic bond platforms, a huge
runway.
But owning that opportunity
comes at a steep price: a forward
price/earnings ratio of about 57
times for MarketAxess, on par with
ultra-popular consumer-facing
technology names such as Square
or Netflix.
At that nosebleed level, the
main question is whether anything
could start to impinge on the
company’s growth story. After a

huge run, the shares have already

corrected a bit in September’s

rotation out of momentum stocks,

coming off a peak valuation of

around 70 times.

One risk is that big banks’ desks

figure out a way to keep more

trade execution share for

themselves, in part by setting up

direct electronic links to clients.

Dealers, for example, have recently

embraced a new way to trade

bonds called portfolio trading,

which encourages clients to trade

baskets of bonds rather than

individual ones.

This could, in theory, shift some

trading away from electronic

marketplaces. Already, about 2% to

4% of bond volume is now being

traded in such portfolios,

MarketAxess said Wednesday.

Things move quickly in this

world, though. MarketAxess says

it, too, is introducing a product

designedto help clients price and

execute portfolio trades.

Portfolio trading could even

spur more electronic trades,

MarketAxess noted, as balance-

sheet-constrained banks look to

unload risk. Nonbank exchange-

traded-fund market makers are

emerging as some big electronic

customers, and might be drawn in

to arbitrage opportunities created

by this dynamic.

Perhaps the biggest unknown is

the competitive landscape. There

are many players in electronic

fixed-income trading, from

Bloomberg to BlackRock, that

stand to have roles as the market

matures.

The growing electronic pie may

enable all to keep growing for a

long time. But some big names

will also be competing head-to-

head. Recently listedTradeweb

Marketsalready is handling some

portfolio trading and has nabbed

share of corporates trading by

linking bonds to its big Treasurys

rate trading business.

MarketAxess recently acquired a

smaller Treasurys platform it

hopes to expand.

Stock-and-futures giant

Intercontinental Exchange, known

as ICE, has bought bond

marketplaces, such as BondPoint,

and bond data providers, such as

IDC, in recent years. It is beginning

to unveil its own strategy for how

it will unite those assets and tackle

the bond market holistically. ICE

says its new ETF hub will help it

compete directly for institutional

bond trade execution.

ICE and Tradeweb are set to

report earnings in the coming

weeks. Investors in MarketAxess

would be wise to pay close

attention.

Bond trading is going electronic,

but the ultimate spoils from that

transition are still up for grabs.

—Telis Demos

Hardly anybody expects much in

the way of inflation anymore. That

is a big problem for the Federal Re-

serve.

The University of Michigan re-

ported that the median expected

inflation rate over the next five to

10 years among consumers it sur-

veyed this month slipped to 2.3%

from 2.4% in September, matching

a record low hit earlier this year.

That is above inflation’s recent

pace, but people’s inflation expec-

tations tend to run on the high

side. Before the financial crisis, ex-

pected inflation was running about

around 3%.

While no single measure is per-

fect, economists at Bank of Amer-

ica Merrill Lynch note that across a

number of inflation expectations,

the trend has been down. Inflation

expectations have slipped among

forecasters surveyed by the Federal

Reserve Bank of Philadelphia, for

example. And the break-even infla-

tion rates embedded in Treasury

inflation-protected securities show

that investors’ inflation expecta-

tions have fallen as well.

Economists think inflation ex-

pectations matter because the

higher people think prices are go-

ing to go, the more apt workers are

to agitate for higher wages, and

the higher businesses will believe

their costs, and the prices they can

charge, will rise. That drives up in-

flation as a result. Low inflation

expectations might be part of why

wage gains which, while stronger

than they were a few years ago, re-

main below levels seen before the

latest recession despite the 50-year

low in the unemployment rate. The

decline in inflation expectations

may also be part of the reason that

inflation has persistently fallen

short of the Fed’s 2% target.

The Fed would like to push infla-

tion expectations higher. If it

doesn’t accomplish this, then get-

ting inflation to hold at its comfort

level will become harder to

achieve. Worries about too-low in-

Low Inflation Views

Give Fed a Headache

MARKETS

Money managers are scal-
ing back wagers on gold, the
Japanese yen and other popu-
lar havens, betting that the
outlook for the U.S.-China
trade war and Brexit will con-
tinue to improve.
Gold prices are down nearly
4% after hitting a six-year high
in September. The yen has
given back around half of the
gains it made against the dol-
lar since a rise in trade ten-
sions earlier this year sparked
a rush for safe assets. Other
havens, including the dollar,
Treasurys and the Swiss franc,
have also softened.
Gold pared an early climb
Friday and the yen edged
lower against the dollar after
U.S. officials said the world’s
two largest economies have
made headway in completing
the first phase of a trade
agreement. U.K. lawmakers en-
dorsed a Brexit deal for the
first time last week, though
they rejected Prime Minister
Boris Johnson’s plan to rush
his deal through Parliament.
More investors also believe
that the Federal Reserve’s eas-
ier monetary policy is starting
to work its way through the
U.S. economy, mitigating con-
cerns about weak economic
data and the impact of trade
fights on growth and corpo-
rate earnings. The Fed cut
rates twice this year, and
many expect the central bank
to do so again at its meeting
this week.
“There isn’t the same ur-
gency to have these assets at
the moment,” said Bart Melek,
head of commodity strategy at
TD Securities. “We’re happy to
sit on the sidelines for now
and see what happens.”
Mr. Melek recently advised
certain clients to sell gold in a
“tactical retreat.” His recom-
mendation to buy came at the
beginning of March, when
prices for the metal were
nearly $200 lower.
Some investors have also
increased their positions in
comparatively risky assets,

BYIRAIOSEBASHVILI
ANDCAITLINOSTROFF

Havens Decline as Money Managers Brave Riskier Seas

Currency performance against dollar

0

–8

–6

–4

–2

%

June July

Aug. Sept Oct.

Trumpannounces

planstomeetwith

ChinaatG-20

Net futures bets on the Japanese yen

50,000 contracts

–100,000

–50,000

0

Jan. Oct.

Sources: Tullett Prebon (currencies, yield); Scotiabank and CFTC (net futures); MSCI (emerging markets)

Japaneseyen

SouthKoreanwon

Britishpound

U.Ssaysitwilldelaya

plannedtariffincrease

MSCI Emerging Markets Index

1100

900

950

1000

1050

May Oct.

Yield on 10-year Treasury note

3.0

1.0

1.5

2.0

2.5

%

May Oct.