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
3OûFARûTHEûRISKSûHAVEûBEENûLARGELYû
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
CREDITûINûNEARLYûAûDECADEû
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
OFûlREûSALESûDESPITEûINVESTORSû
pulling billions of dollars out of
corporate bond funds. Instead, data
showed record trading volumes in
53ûHIGH
YIELDûCORPORATEûBONDSû
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
FUNDûOUTmOWSûWITHûTHEû%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
'OUSIASûHEADûOFûmOWûCREDITû
trading for EMEA at Nomura,
referring to the process in which
asset managers bar withdrawals
FROMûTHEIRûFUNDSûh)FûSOMEONEûBIGû
GATESûITLLûBEûLIKEûWHENûTHEûlRSTû
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
LASTûSTUDYûFOURûYEARSûAGOûANDûCALLEDû
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
&EBRUARYûACCORDINGûTOû&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
2IDDELLûHEADûOFû5+ûlXEDûINCOMEû
at Allianz Global Investors.
Investors pulled US$16.1bn out
OFûINVESTMENT
GRADEûHIGH
YIELDû
and emerging-market debt funds
in the week ended March 4, the
SECONDûHIGHESTûOUTmOWûONûRECORDû
according to Bank of America. That
FOLLOWEDû53BNûDRAININGûOUTûOFû
HIGH
YIELDûDEBTûFUNDSûINûTHEû
PREVIOUSûWEEKLYûPERIODûTHEûTHIRDû
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,
INDUSTRYûEXECUTIVESûESTIMATEû
helping portfolio trading
volumes more than double in
7HILEûTHEûMAJORITYûOFûTHATû
ACTIVITYûHASûBEENûCONCENTRATEDû
in investment-grade bonds until
NOWûMARKETûPARTICIPANTSûSAYû
demand for portfolio trading has
BEENûINCREASINGûINûTHEûHIGH
YIELDû
MARKETûPARTICULARLYûDURINGûTHEû
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,
EXECUTIVESûSAYûPROVIDINGûANOTHERû
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*ONESû
head of trading in North America
for Aviva Investors.
h)ûWASûMAYBEûAûLITTLEûBITûMOREû
SURPRISEDûATûHOWûMANYûWEREû
ACTUALLYûEXECUTEDûTHEûSIZEûOFûTHEû
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
NINEûMONTHSûOFûLASTûYEARûMOREû
than double the entire amount
that was transacted the previous
YEARûACCORDINGûTOûAû-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