Record inflows have taken assets in U.S.-based fixed-income ETFs to just over $1 trillion, the highest-level ever. They won new fans in the coronavirus-triggered market turmoil in the first quarter, when liquidity in bonds and credit all-but evaporated but ETFs kept trading.
“Client adoption really took off during the market volatility in March,” said Enrico Bruni, head of Europe and Asia business at Tradeweb. “Our clients are always looking out for the best way to access liquidity in every market condition and electronic portfolio trading helps them do exactly that.”
The economic blow from the pandemic also caused central banks to ramp up bond-buying, while investors were left scrambling for yield after policy makers slashed interest rates.
As a result, bondholders became less likely to sell. The average bid-ask spread in credit has risen to about 95 cents globally, according to Bloomberg Barclays indexes. With the average yield near record-lows at 1.55%, the cost of doing a deal quickly eats into any returns, creating another headwind to activity.
Size Matters
Corporate bond investors looking to adjust their risk profile can find other pockets of liquidity, however — some of them far deeper.
Credit-default swap indexes represent a different set of exposures than holding cash bonds or ETFs, but the market for them is huge and highly liquid.
In October, trading in contracts that track a basket of CDS on high-grade North American firms totaled almost $190 billion, according to Depository Trust & Clearing Corporation data. For the equivalent European contract it was 80 billion euros ($95 billion).
Despite their growth, ETFs represent a fraction of the debt market overall, and harvesting the benefits of portfolio trading isn’t always straight-forward.
Getting the most out of the strategy is “conditional on a few factors being met pre-trade such as a diverse list of bonds, sectors and maturities,” according to Campbell at BlueBay.
This article was provided by Bloomberg News.