NEW YORK – Debt markets have so far passed their biggest test since the 2007-2009 financial crisis, liquidity remaining intact as concerns grow over the economic impact of the coronavirus, according to market experts .
Although analysts and investors expect liquidity to tighten if markets remain tight for the next few weeks, they are confident that debt markets are operating in a way that avoids credit crunch in all markets. except the most extreme scenarios.
The structure of the fixed income market has changed over the past decade, largely due to post-financial crisis regulations which make it more costly for banks to act as market makers.
While this has reduced the risk of bankruptcy, it has shifted bond market liquidity to professional trading companies, many of which trade on electronic platforms. It has also made exchange traded funds (ETFs) a more attractive option for many businesses when sourcing cash.
Some analysts and investors have expressed concern over the banks’ withdrawal, which has left the debt markets vulnerable to freezing in times of stress. They also expressed concern that large ETF cash outflows would leave managers stuck with illiquid bonds that they cannot discharge.
However, Matt Freund, head of fixed income strategies at Calamos Investments, said that, so far, the credit and bond markets have remained relatively liquid and prices have been transparent.
“We are certainly not out of the woods and we are going to have to be beaten down the road, but I think the markets are working as they should,” he said. “The large ETFs have done a very good job in focusing attention on the most liquid names.”
Bond ETFs, which hold more than $ 1 trillion in assets, have made it easier for investors to adjust the level of risk in their portfolios during times of volatility, said Kevin McPartland, head of market structure and technological research at Greenwich Associates.
He highlighted the iShares iBoxx High Yield Corporate Bond ETF, or HYG, whose volumes increased much more than the volumes of the underlying bond market.
“Market players, whether individual or institutional, are now able to position themselves or reposition themselves very quickly, whereas if you had to move around in complete bond portfolios, it would have been much more difficult and much more long, “said McPartland.
Freund de Calamos said he expects prices to be more volatile than they would have been in previous crises, in part due to the removal of trading fees for many retail investors.
“People have gone exceptionally short term in their thinking because there is no cost to sell everything today and buy it back tomorrow,” he said.
Fixed income electronic trading volumes increased in February along with increased volatility.
Tradeweb Markets, which compares buyers and sellers of rates, credit, stocks and money markets, and MarketAxess, an electronic fixed-income trading platform, recorded record trading volumes in February.
(Reporting by Matt Scuffham and John McCrank; Editing by Tom Brown)
NEW YORK – Debt markets have so far passed their biggest test since the 2007-2009 financial crisis, liquidity remaining intact as concerns grow over the economic impact of the coronavirus, according to market experts .
Although analysts and investors expect liquidity to tighten if markets remain tight for the next few weeks, they are confident that debt markets are operating in a way that avoids credit crunch in all markets. except the most extreme scenarios.
The structure of the fixed income market has changed over the past decade, largely due to post-financial crisis regulations which make it more costly for banks to act as market makers.
While this has reduced the risk of bankruptcy, it has shifted bond market liquidity to professional trading companies, many of which trade on electronic platforms. It has also made exchange traded funds (ETFs) a more attractive option for many businesses when sourcing cash.
Some analysts and investors have expressed concern over the banks’ withdrawal, which has left the debt markets vulnerable to freezing in times of stress. They also expressed concern that large ETF cash outflows would leave managers stuck with illiquid bonds that they cannot discharge.
However, Matt Freund, head of fixed income strategies at Calamos Investments, said that, so far, the credit and bond markets have remained relatively liquid and prices have been transparent.
“We are certainly not out of the woods and we are going to have to be beaten down the road, but I think the markets are working as they should,” he said. “The large ETFs have done a very good job in focusing attention on the most liquid names.”
Bond ETFs, which hold more than $ 1 trillion in assets, have made it easier for investors to adjust the level of risk in their portfolios during times of volatility, said Kevin McPartland, head of market structure and technological research at Greenwich Associates.
He highlighted the iShares iBoxx High Yield Corporate Bond ETF, or HYG, whose volumes increased much more than the volumes of the underlying bond market.
“Market players, whether individual or institutional, are now able to position themselves or reposition themselves very quickly, whereas if you had to move around in complete bond portfolios, it would have been much more difficult and much more long, “said McPartland.
Freund de Calamos said he expects prices to be more volatile than they would have been in previous crises, in part due to the removal of trading fees for many retail investors.
“People have gone exceptionally short term in their thinking because there is no cost to sell everything today and buy it back tomorrow,” he said.
Fixed income electronic trading volumes increased in February along with increased volatility.
Tradeweb Markets, which compares buyers and sellers of rates, credit, stocks and money markets, and MarketAxess, an electronic fixed-income trading platform, recorded record trading volumes in February.
(Reporting by Matt Scuffham and John McCrank; Editing by Tom Brown)