Higher for longer: Macroeconomics driving the global bond market
5 June 2024
With fixed income lending on the rise globally, Mike Norwood, head of trading at EquiLend, explores some of the drivers behind global securities finance markets movements
Image: stock.adobe.com/Enrique
Fixed income volumes saw all-time highs on your NGT platform in recent months. What is driving volatility in the fixed income market and the associated securities finance demand?
The phrase 鈥榟igher for longer鈥� is being used widely this season and is thematic of the fixed income trends seen globally in late Q1 and early Q2. High-yield debt trade count was up 20 per cent, with notional up 25 per cent from March. We saw from NGT data an all-time daily trade count high with 46,284 trades printed on 3 April 2024. The previous high was 42,526 traded on 18 December 2023.
Behind this are several factors 鈥� the primary being inflation. US inflation is tapering slightly, but remains well above the target zone of Powell鈥檚 Fed, dampening hopes of any rate cuts in the near term, fuelling fixed income 鈥榝ires鈥�. This is also the case for European markets, with the European Central Bank (ECB) and the Bank of England (BoE), holding their cards close to their chests on rate decisions. High interest rates have generally led to increased demand for fixed income instruments and locking in higher yield. Meanwhile supply is capitalising, with new issues up 30 per cent year on year (YoY), per the 色花堂Industry and Financial Markets Association (SIFMA), and net inflows have been seen in bond funds.
Outside of the economic factors, there is a greater uptake of electronification in the fixed income space and more trades are happening digitally on platforms like NGT, driving up volumes. Market regulations such as CSDR and SFTR can certainly be attributed to driving this increase in electronification as they disincentivise the operational risk associated with manual trade bookings. Due to differing technology stacks, we have historically seen fixed income desks lag behind equity in straight-through processing (STP) rates, but have observed fixed income electronic trading on NGT grow year on year since 2019, with 30 per cent growth over that time horizon and with a resounding 62 per cent increase in fixed income trading on NGT for April 2024, against the same month last year. The gap is closing, and there is significant demand by fixed income organisations to implement STP to add scale and keep up with heightened activity.
Regarding the highs in fixed income trading on NGT this year, were there any big surprises in your data?
The 62 per cent increase in YoY volumes from April 2023 to April 2024 really stands out. Our fixed income volumes have been driven by corporate debt demand. Given it trades in a manner more similar to equities, it has been a natural fit for NGT flows. In April, we saw that while investment-grade corporates are still the bulk of activity, sovereign debt activity grew in the Americas and EMEA, with US Treasury activity up 50 per cent. From March to May, we saw yields blown out by 75bps, recently reining in and stabilising with 10-year rates sitting at 4.5 per cent as of the end of May.
The biggest surprise was from Asia Pacific markets. Japan has seen rates hold at near-zero levels thanks to yield curve control measures for the last two decades, but also experienced a fixed income escalation. Japanese government bonds (JGBs) 10-year sit 63bps higher YoY. This is a very large move in a Zero Interest Rate Policy (ZIRP) environment. New indexes which include Japan have also opened new trading flows in the Japanese market, all of which can be traded on NGT.
What is the broader global market story? Are there non-economic drivers at play in these fixed income highs?
We have seen upward momentum in corporate bond issuance, up 27.9 per cent from 2023 levels, and half-year issuance is up 74 per cent YoY.
Emerging market debt has seen a 16 per cent increase in issuance, driven largely by Chinese issuers, with a lot of focus on a convertible bond resurgence, with two major players issuing more than US$3 billion of issuance alone in recent weeks. This story is true across the board, which is unusual in a world where 鈥榬arely does one economy catch the other鈥檚 cold鈥�. Japan also reflected 26.9 per cent growth in domestic corporate bond issuance and European bonds were up 21.5 per cent in the first four months of 2024. 聽
Global volatility plays into this positive picture for the lending market as investors look to bonds 鈥� traditional safe havens. Further, more and more of us are being expected to create efficiencies, to add scale and to 鈥榙o more with less鈥�. This pressure, along with discretionary budgets having been eroded by the need to divert investment to address the evolving regulatory climate as well as accelerated settlement, has meant a renewed focus on STP.
We are seeing increased fixed income activity on the whole, but we are also seeing more of that total activity happening electronically. Traders, management and compliance departments definitely see the benefit of a global, regulated, digital platform like NGT in achieving their internal goals.
The phrase 鈥榟igher for longer鈥� is being used widely this season and is thematic of the fixed income trends seen globally in late Q1 and early Q2. High-yield debt trade count was up 20 per cent, with notional up 25 per cent from March. We saw from NGT data an all-time daily trade count high with 46,284 trades printed on 3 April 2024. The previous high was 42,526 traded on 18 December 2023.
Behind this are several factors 鈥� the primary being inflation. US inflation is tapering slightly, but remains well above the target zone of Powell鈥檚 Fed, dampening hopes of any rate cuts in the near term, fuelling fixed income 鈥榝ires鈥�. This is also the case for European markets, with the European Central Bank (ECB) and the Bank of England (BoE), holding their cards close to their chests on rate decisions. High interest rates have generally led to increased demand for fixed income instruments and locking in higher yield. Meanwhile supply is capitalising, with new issues up 30 per cent year on year (YoY), per the 色花堂Industry and Financial Markets Association (SIFMA), and net inflows have been seen in bond funds.
Outside of the economic factors, there is a greater uptake of electronification in the fixed income space and more trades are happening digitally on platforms like NGT, driving up volumes. Market regulations such as CSDR and SFTR can certainly be attributed to driving this increase in electronification as they disincentivise the operational risk associated with manual trade bookings. Due to differing technology stacks, we have historically seen fixed income desks lag behind equity in straight-through processing (STP) rates, but have observed fixed income electronic trading on NGT grow year on year since 2019, with 30 per cent growth over that time horizon and with a resounding 62 per cent increase in fixed income trading on NGT for April 2024, against the same month last year. The gap is closing, and there is significant demand by fixed income organisations to implement STP to add scale and keep up with heightened activity.
Regarding the highs in fixed income trading on NGT this year, were there any big surprises in your data?
The 62 per cent increase in YoY volumes from April 2023 to April 2024 really stands out. Our fixed income volumes have been driven by corporate debt demand. Given it trades in a manner more similar to equities, it has been a natural fit for NGT flows. In April, we saw that while investment-grade corporates are still the bulk of activity, sovereign debt activity grew in the Americas and EMEA, with US Treasury activity up 50 per cent. From March to May, we saw yields blown out by 75bps, recently reining in and stabilising with 10-year rates sitting at 4.5 per cent as of the end of May.
The biggest surprise was from Asia Pacific markets. Japan has seen rates hold at near-zero levels thanks to yield curve control measures for the last two decades, but also experienced a fixed income escalation. Japanese government bonds (JGBs) 10-year sit 63bps higher YoY. This is a very large move in a Zero Interest Rate Policy (ZIRP) environment. New indexes which include Japan have also opened new trading flows in the Japanese market, all of which can be traded on NGT.
What is the broader global market story? Are there non-economic drivers at play in these fixed income highs?
We have seen upward momentum in corporate bond issuance, up 27.9 per cent from 2023 levels, and half-year issuance is up 74 per cent YoY.
Emerging market debt has seen a 16 per cent increase in issuance, driven largely by Chinese issuers, with a lot of focus on a convertible bond resurgence, with two major players issuing more than US$3 billion of issuance alone in recent weeks. This story is true across the board, which is unusual in a world where 鈥榬arely does one economy catch the other鈥檚 cold鈥�. Japan also reflected 26.9 per cent growth in domestic corporate bond issuance and European bonds were up 21.5 per cent in the first four months of 2024. 聽
Global volatility plays into this positive picture for the lending market as investors look to bonds 鈥� traditional safe havens. Further, more and more of us are being expected to create efficiencies, to add scale and to 鈥榙o more with less鈥�. This pressure, along with discretionary budgets having been eroded by the need to divert investment to address the evolving regulatory climate as well as accelerated settlement, has meant a renewed focus on STP.
We are seeing increased fixed income activity on the whole, but we are also seeing more of that total activity happening electronically. Traders, management and compliance departments definitely see the benefit of a global, regulated, digital platform like NGT in achieving their internal goals.
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