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Fixed Income Outlook: Expanded Access to Liquidity, and Opportunities Amidst Trade Tension


The uptick in global trade tension is on the minds of nearly all fixed income investors, and with good reason, but there is plenty of good news, too. Economic growth is anticipated to continue even if the pace of it might slow. Inflation fears are minimal, and, for the moment at least, opportunities abound in fixed income in areas such as securitized credit (which has had a serious makeover since the financial crisis). Technology and the electronification of fixed income trading continue to evolve, and that has led to more good news – live streaming liquidity in U.S. credit.


Deep Dive: The Credit Outlook

To get into the weeds a bit on the credit outlook, we asked Joseph Kalish, Chief Global Macro Strategist at Ned Davis Research Group (NDR), and NDR’s Veneta Dimitrova, Senior U.S. Economist, to tell us what’s currently on their radar screen.

Here’s a summary of what Kalish and Dimitrova have included in their H2 outlook as of June 6, 2019*:

  • We reaffirm our marketweight/neutral outlook on corporate credit. Overall, the data is mixed, which argues for a continued allocation to credit, but not an aggressive or defensive posture at this time. We continue to favor the middle of the credit spectrum, or BBB and BB. BBBs represent half of IG corporates in U.S. and Europe.
  • Investment grade and high yield spreads remain historically tight. Flows into high yield have dried up, but continue to be seen in investment grade. Spreads per unit of duration remain a little rich for investment grade, but close to their historical averages for high yield. Investment grade yields are falling more than spreads are widening. The high yield cash/assets ratio is no longer bearish. Liquidity, however, has improved.
  • Economic fundamentals are still favorable. The economy is clearly slowing, based on a slew of our favorite leading indicators, including the Credit Managers’ Index, the ISM indexes, the Composite Leading Index, the OECD Composite Leading Indicators, and the state leading indicators. Nevertheless, our Credit Conditions Index remains favorable for economic growth, and there is little danger of recession.
  • Technicals are mixed. Breadth and momentum are supportive for investment grade credit, but high yield has weakened. Similarly, high yield relative strength has softened, but has not yet broken down. Cross-asset volatility is no worse than neutral. Low volatility is conducive for carry
  • Longer-term, we remain concerned about the deterioration of corporate credit quality and the lack of trading liquidity. But we aren’t overly concerned today, as most companies don’t have problems making their interest payments.
  • We prefer loans to high yield bonds on valuation and relative performance. Loans are modestly cheap compared to high yield, which have seen relative performance roll over.

*See important information and disclaimers below.


What Investors Are Saying

At the II Fixed Income Forum in Washington, D.C., in April, asset owners from pension funds and asset managers participated in real-time polling regarding the outlook for fixed income. Here is the top response to a question on the challenges faced by their organizations today.



Live Streaming Liquidity for U.S. Credit Has Arrived


Greater adoption of electronic trading has driven the average trade size down, and alongside that, liquidity in the bond market has evolved. The result? Expanded access to liquidity – especially that available in the retail market has become increasingly relevant to institutional traders. To cater to this demand, Tradeweb has integrated once highly discrete, liquidity pools from the firm’s institutional and Tradeweb Direct platforms. II spoke with Tradeweb’s Amanda Meatto (above right), Head of Sales and Relationship Management at Tradeweb Direct, and Iseult Conlin (above left), U.S. Institutional Credit Product Manager, to hear more about how they innovate to open up access for clients to more than $6bn of actionable liquidity per side in more than 6,000 CUSIPs.

Is it more significant that institutional traders can now access streaming liquidity, or that they can do so without interrupting their usual workflow?

Iseult Conlin: It’s both. For most institutional clients, this is the first time they are accessing live streaming retail liquidity – that is, continuous firm quotes that are immediately actionable – as we have historically operated the two marketplaces on separate platforms. There are a lot of institutional buy-side participants that still don’t know this liquidity exists, and even those who previously knew, tended to ignore it because they couldn’t access it easily from their screens. That was compounded by the different use of execution protocols within these market segments, which made it all the more difficult for large institutional buy side firms with RFQ workflows to access streaming liquidity elsewhere. Market convention has also played a part: the retail business typically trades off price, and the institutional buy-side is more spread-based. At Tradeweb, we have integrated $10bn of additional liquidity without altering either participant’s normal workflow. That’s really significant improvement for these trading communities.

Amanda Meatto: I agree. The one thing we hear consistently from clients is that they don’t want to have to log in to lots of different platforms. We totally understand – simpler is better – and especially when workflow, behavior and compliance procedures are already so ingrained. That’s why we made a very deliberate choice to deliver a solution for traders that expands the picture but doesn’t alter the screen.

And why is Tradeweb Direct uniquely positioned to provide this capability?

Meatto: Well 80% of retail corporate trades are actually live streaming markets so it makes sense to offer it to institutional accounts as well. On average daily, Tradeweb Direct offers 16,000 live markets on quotes of $250K and above, and over 5,000 live markets on those over $500K. We didn’t really need to persuade the institutional buy-side on how useful that was: the trade sizes are very similar to existing volume on the platforms they use each day, and so it was really a no-brainer for them.


Are there deal size thresholds for the retail liquidity in this integrated liquidity pool?

Meatto: From the Tradeweb Direct side, we now stream all markets up to $1 million onto the institutional platform. For a trade larger than that, you’d typically expect to see a response via RFQ anyway. On the taker side, the liquidity initiator is looking to see how many more additional quotes they’ll get, and they’re seeing anywhere from a 40 – 50% increase of respondents.

Is the integrated liquidity pool only for investment grade corporates?

Conlin: We’re talking about everything that falls under the umbrella of U.S. Credit – investment grade credit, high-yield, even emerging markets. For anything under $250,000 notional, Tradeweb Direct markets account for more than 18% of the anonymous trades on the institutional platform. The trade sizes might be smaller, but the huge positives of competitive pricing are there for IG, HY and EM.

Is there interest in the integrated liquidity pool outside of the U.S.?

Conlin: Absolutely, the European market structure tends to be a price-based market, and so it leans toward streams and click-to-trade. This means our current efforts really gel with what they’re used to seeing already, and we’ve got Europe-based clients, who want to use the solution. We’ve already seen them take some of their U.S. dollar credit trading in particular and bring that over, because they are accessing liquidity that they couldn’t otherwise. That has a network effect: diverse liquidity begets more diverse liquidity.

Meatto: We’re focused on making this solution as intuitive and accessible as possible. It’s obviously less straightforward to integrate counterparties in different countries due to regulatory and compliance variations, but our size and scale across global markets really helps when it comes to addressing these pain points. We’re focused on providing a single point of execution for participants, whatever the firm, and wherever they trade.

Technology’s effect on fixed income is continually evolving. Here is more recommended reading and viewing to help you keep up with the latest trends.

“Electronification” and the Technology Revolution in Corporate Bond Trading

Portfolio Traders Turn to Tech: A New Generation of Strategies

The Buy Side’s Big Leap of Sophistication in U.S. Credit

Reducing Trading Costs for U.S. Corporate Bonds

Intelligently Automating Trade Execution


What Investors Are Saying

At the II Fixed Income Forum in Washington, D.C., in April, asset owners from pension funds and asset managers participated in real-time polling regarding the outlook for fixed income. Here is what they are thinking about factor investing in fixed income.


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The data and analysis contained in NDR’s publications are provided “as is” and without warranty of any kind, either expressed or implied. The information is based on data believed to be reliable, but it is not guaranteed. NDR DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE.

NDR’s reports reflect opinions of our analysts as of the date of each report, and they will not necessarily be updated as views or information change. All opinions expressed therein are subject to change without notice, and you should always obtain current information and perform due diligence before trading. NDR or its affiliated companies or their respective shareholders, directors, officers and/or employees, may have long or short positions in the securities discussed in NDR’s publications and may purchase or sell such securities without notice.

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What Investors Are Saying

At the II Fixed Income Forum in Washington, D.C., in April, asset owners from pension funds and asset managers participated in real-time polling regarding the outlook for fixed income. Here are the responses to a question regarding what they feel to be the top risks in credit.