In recent years, the headline-grabbing news for the US corporate bond market was acutely focused on the sudden proliferation of electronic bond trading venues. They came, they saw, and most conquered. The success of these platforms was a critical step in the electronic evolution of a historically voice-based and stubbornly old-school market. And the influences of these new liquidity pools set the stage for bond desks to take more than a few baby steps away from the cumbersome trade workflow of the past.
A recent Bloomberg report underscores just how far this market has come. Citing recent research by Morgan Stanley, Bloomberg says US bond desks have executed upward of $88 billion in portfolio trades in 2019 – representing a stunning growth from near-zero only a few years earlier.
According to Morgan Stanley research, in all basket size instances, the number of portfolio trades that occurred have at least doubled. Remarkably, the number of portfolio trades for baskets with 140 or more bonds has increased from 37 to 332, representing a nearly tenfold year-over-year jump (see Exhibit 1, below).
Anecdotally, these figures are only the beginning of a larger market shift. The Bloomberg report cites that Citigroup has executed multiple $1 billion-plus portfolio trades since the inception of portfolio trading at the bank and that today bond blocks between $200 million and $500 million are commonplace.
And what is behind this sudden growth? Half of the equation boils down to new technology. The other half lies within another corner of the market capturing headlines recently: the fixed income ETF. Bond ETFs, in particular, have been in the spotlight for years now for their ability to provide novel solutions to traditional cash flow, allocation, and liquidity challenges facing the asset management community. Underlying the ETF is a unique creation/redemption market structure in which baskets of bonds are exchanged for ETF shares.
So just how far have fixed income ETFs come in terms of market presence? Certainly, fixed Income ETFs have been gaining momentum among institutional investors as a viable asset class in their own right for the past several years. This year, however, is significant – looking to recent net flows into ETFs for 2019 vs. 2018, we see an important balance shift. While total ETF cash inflow for 2019 is on track to come in just shy of last year’s record total, it is the dynamic of ETF asset classes attracting the most flow that is interesting. Exhibit 2, below, breaks down the cash flow into the top five ETF asset classes for 2018 and 2019 year to date.