Expectations of a borrowing deluge from corporates globally are turning bond market attention to a little-known tool that's already helping smooth trading of illiquid debt the way exchange-traded funds did years ago.
During volatile times, trading in corporate bonds and other risky assets can dry up, forcing sellers to slash prices. But market participants have reported several instances when even debt from stricken hospitality and travel firms, packaged into bond portfolios, smoothly changed hands. Once constructed, an order is sent, either directly to counterparties or over trading platforms, which quote a price reflecting the value of all the securities the portfolio contains.
The tool proved handy for Andrew Falco, global head of FX and fixed income trading at Fidelity International. Seeking higher exposure to longer-maturity debt, Falco's team used it for a"very decent sized transaction", he said.The trend is gathering speed in world corporate bond markets, worth more than US$10 trillion.
Technology has allowed the trend to gather speed by computerising a process that previously relied on spreadsheets and manually inputting data. In an electronic format, a portfolio trade becomes a much easier"workflow" for a dealer because the bonds are already in the system and can be grouped together more easily than was previously the case.
The strategy, like others, isn't perfect. Some traders said it stalled at the height of the March turmoil, when even the highly liquid U.S. Treasury market and ETFs were seizing up.For one, corporate borrowing is soaring, with companies likely to take on US$1 trillion of new debt this year, Janus Henderson predicts.
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