A US corporate bond manager receives a large inflow at 2 pm on a quiet Friday. Can they efficiently put the cash to work before the weekend?
Fifteen years ago, the answer was probably not. Today, thanks to an expanded credit trading toolkit that includes portfolio trading, index-based total return swaps, and credit futures, the answer is probably yes, perhaps with just a small amount of risk going unhedged over the weekend.
That scenario analysis was a takeaway from a panel entitled The Expanding Credit Toolkit: The Evolving Ways Investors Trade and Access Credit at Bloomberg’s The Future of Fixed Income conference, held Oct. 8 in New York.
Umesh Gajria, Head of Multi-Asset Indices at Bloomberg and the panel moderator, set the stage by saying that years ago credit traders’ choices were limited to cash bonds or credit default swaps – now there are more trading tools, and importantly, the unit of trading is increasingly at the portfolio level.
Phil Cichlar, Fixed Income Specialist, Institutional Sales & Trading at Jane Street, noted that along with the increase in electronic trading, exchange-traded funds have expanded from 100-200 bonds per ETF to 3,000 or more; the distribution of index products has grown significantly; and portfolio trading has evolved from a niche product for insurance companies, to a mainstream protocol that comprises as much as 30% of dealer-to-client trading in the investment grade market.
“Growth on the indexation side has been complemented by technological improvement that has allowed innovation to happen,” Cichlar said.
CME Group launched credit futures in June 2024 and the exchange operator has since expanded its credit futures ecosystem. Ted Carey, Executive Director, Fixed Income Products at CME, said macro credit trading tools including ETFs, portfolio trading, total return swaps and futures complement each other with liquidity interconnected between instruments,
Carey said credit futures can provide a proxy to the cash market, as an alternative to total return swaps. It is a “plug and play way to get exposure,” he said.
Credit futures are exchange-traded, which obviates the need for an asset manager to go to a liquidity provider for pricing. “It’s another way to hedge, another way to put risk on,” Cichlar said. “It’s another tool in this interconnected marketplace that continues to grow.”
Speaking to the utility of portfolio trading, Cichlar noted a remarkable data point about the liquidity deprecation of a bond – specifically, that on average, a 30-year bond trades about half as much as it ever will in just its first six months. Portfolio trading can change the liquidity depreciation dynamic, though it comes with a massive need to access and analyze data, which firms are addressing with AI.
Jake Riley, Portfolio Manager at Vanguard, noted that there is substantial off-screen liquidity across the current credit ecosystem. “Liquidity is there even if it’s not staring you in the face,” he said.
Tying back to the hypothetical Friday 2 pm scenario, Riley said his desk would consider multiple factors in determining how to put the cash to work. These would include the flow and direction of the overall market; expectations of market change and momentum; the relative basis between the different products available; trade risk and urgency; as well as flexibility, tracking error, and transaction costs. “All that will play together in order to make a decision,” Riley said.
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