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Fixed Income & Data Services/Fixed Income/Fixed Income Monthly Report | ICE
June 2023

ICE Fixed Income monthly report

In this edition, Amanda Hindlian our President of Fixed Income & Data Services shares her views on the second wave of digital bond trading, and how investor preferences are influencing market dynamics. You can also watch the latest interview in our Fixed Income in Focus video series on how climate risk is affecting the municipal bond markets.

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Bond market evolution: the second wave

When we talk about shifts in market structure for bond trading, much commentary is focused on the behemoths of data and technology as drivers of change. Yet alongside this, investor preference is underpinning some compelling trends. Take the rise of ETFs. The popularity of these liquid, transparent investments could have ramifications for trading protocols, trade size, and even spreads.

We know for example, that the digitization of bond markets - and resulting rise in execution speed - has seen investors seek systematic ways to offload risk on multiple securities at once. This has supported the rise of portfolio trading, which allows traders to move large bond portfolios fast, in a single transaction. Portfolio trading supports ETFs by helping automate aspects of the monthly rebalancing process, and analysis from my colleagues suggests this protocol already comprises a meaningful amount of daily trading in bond markets.

Traditional trade size and spread dynamics are also being impacted, at least in part by the rise of ETFs. While larger bond trades have tended to enjoy the highest quality execution, the need for ETFs to maintain representative baskets of a broad set of holdings has helped smaller ‘odd lots’ to find buyers. Alongside this, the electronification of bond markets has supported a reduction in median trade ticket size, with credit algos auto-executing smaller trades.

A consequence of greater liquidity for smaller trade sizes has been spread compression. Market conditions matter of course – notably, volatility has caused odd lot spreads to spike significantly. But since 2019, ICE’s analysis shows a trend of more drastic compression of bid/ask spreads for odd lots compared to institutional round lots.

The broader impact of these dynamics is greater choice. If the spread difference between large and smaller trades is narrowing, and new protocols are being supported, market participants have more avenues to execute a given trade. In other words: if the first iteration of electronic bond trading brought efficiencies, the second wave is bringing greater sophistication.

BestEx Analysis: Porfolio Trade Scores vs Benchmark Scores

Source: ICE (As of 6/16/23)

We analyzed trades designated as portfolio trades in TRACE since the flag was implemented on May 15th. The chart above breaks out the Portfolio trades by liquidity score, with 1 being the least liquid and 10 the most liquid. The bars on the chart reflect a positive relationship between liquidity scores and trade counts.

Using our BestEx and ICE Liquidity Indicators services, we generate a BestEx Score for all trades sharing the similar asset class, tenor, trade side and trade size that receive the same liquidity score (Benchmark BestEx Score). Our analysis shows that the average portfolio trade scored higher than the average benchmark score.

Insights

Impact bonds: getting granular on corporate sustainability efforts


Impact bonds

As social and green bond issuance soars around the world, measuring the sustainability performance over the life of a bond is growing in importance, and complexity.

Bond issuers and investors are taking a more active approach to ensure projects and investments are achieving sustainable goals. Similarly, investors want to measure their contribution to those goals through their funding.

Fixed Income in Focus

Climate risk and its impact on the municipal bond markets


While bond markets are focused on the macroeconomic backdrop, they’re neglecting to price in climate risk. ICE’s Head of R&D, Sustainable Finance Evan Kodra speaks to ICE’s VP of Fixed Income Corporate Development Michele Nicoletta about how the industry can address this, and the opportunities for investors.

Click here

Insights

Early observations about the new Portfolio Trade Flag from FINRA® TRACE


Fund liquidity scrutinized by global regulators

The electronification of fixed income markets has led to a few salient patterns:

  • Median trade ticket sizes have been trending smaller
  • Investors have looked for systematic ways to offload risk on multiple securities simultaneously

The second point above led the Fixed Income Market Structure Advisory Committee (FIMSAC) to recommend that the Financial Industry Regulatory Authority (FINRA) amend its Trade Reporting and Compliance Engine (TRACE) disclosure rules so market participants could reliably identify portfolio trades.

Webinar - Thursday, Jul. 13, 10 a.m. ET

Evolving to an integrated market, credit and liquidity risk management mind-set


Join experts from SS&C Algorithmics and ICE for a timely and insightful webinar on how investment and risk practitioners benefit from an integrated risk management viewpoint. The webinar will cover the importance of expanding your data scope, portfolio simulation analytics, and surrounding processes beyond siloed approaches.

A panel of industry experts will discuss:

  • Why investment and risk management professionals need to look beyond market risk, including key considerations for integrating market, credit and liquidity risk
  • Liquidity risk components
  • Market liquidity data drivers
  • The evolution of liquidity stress testing models over time
  • Integration and derived insights for risk managers/front office

Register here

Webinar Replay

Best Practices: Post-pandemic Review of Funds’ Liquidity Risk Management Programs


Global regulators are looking to improve fund liquidity requirements as part of the post pandemic review and recent market volatility. They are seeking to strengthen buy-side liquidity management programs to help boost transparency and bolster sector resilience. The areas of focus are common across several jurisdictions such as liquidity stress testing, liquidity classification, and liquidity management tools.

We recently hosted a webinar where experts from ICE and FactSet discussed the proposed changes and their impact globally.

Watch the replay

Fixed Income

Manage risk, uncover opportunities, and make informed decisions in real-time with ICE’s end-to-end fixed income solutions. Reimagine your fixed income workflow from price transparency & discovery and efficient execution through to performance analysis.

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