Given the growing geopolitical pressures globally and some of the election outcomes to date, Christophe Roupie, head of EMEA and APAC, and chief executive of UK at MarketAxess discusses how the outlook for fixed income markets has changed materially from the start of the year.
In early 2024, investor sentiment steadied against a more favourable rates environment and broadly improving market conditions. However, recent surprise election results and polling activity weighed heavily on bond investors as we moved into summer.
While the UK general election result was priced in, and data from TraX showing a slight uptick in UK Government bond prices, markets were rattled by gains made by the political far right – initially in the European Parliament elections, and then in France following Emmanuel Macron’s decision to call a snap election.
The expected initial gains by the far right in the French election led to a winning left-wing coalition in the second round amongst taxing political manoeuvres. The result is a divided Assemblée Nationale with no absolute majority, leaving Europe’s second largest economy without clear direction.
This has caused havoc for French capital markets, and it will certainly take time to reassure investors as the political picture slowly settles. We are already seeing a busier than expected summer in markets – which we largely expect to continue – with heightened volatility, a challenging liquidity environment and a likely continued ‘higher-for-longer’ interest rate scenario.
The events in Europe and their knock-on effects into markets have now been further heightened by the US presidential election in November. With President Biden dropping out and Kamala Harris now Donald Trump’s opponent, investors are weighing up the potential impacts of the respective candidate’s presidency. During the build-up to the election, markets will be in flux as they as prepare for a Trump or Harris presidency.
Despite all these uncertainties, the broad outlook for investors in bond markets remains promising – known for their relative security and stability, they have maintained high yields compared to recent history.
Investors need to focus on selecting the right markets and sectors, effectively managing risks, and allowing for best execution within that market.
And while the challenge of market entry and accessing liquidity is always there, continued technological advancements are forming the foundation upon which innovative tools applied across the trade lifecycle are developed and refined. There are today a myriad of technologies and solutions that can help.
This approach forms the basis of how MarketAxess is innovating, with high-quality market data being at the core of any technological advancement. The proliferation of high-quality datasets in bond markets has also driven its broader evolution: the automation of the market.
As seen with many industries, the bond markets have also recognised the potential of artificial intelligence (AI) and machine learning (ML). At MarketAxess we have used this to address a range of activities, with one key example being price discovery – one of the main headaches for investors – wherein CP+ provides an accurate tool for predictive real-time pricing for global credit and rates markets.
Bond markets are democratising through the expansion of new liquidity pools and increased accessibility to global markets.
This is embodied in our all-to-all trading model, Open Trading. It has continued to strengthen markets by identifying new pockets of liquidity, which is critical not only for traditional markets such as Eurobonds, US investment grade and high yield credit, but also for unlocking opportunities in developing markets and enabling investors to access more opportunities, and with speed.
More and more markets are progressively opening up and evolving, as investors demand greater access to local and hard currency debt. A notable recent example is the inclusion of Indian government bonds in JP Morgan’s emerging market debt index, which enhances tradability and attracts foreign investment in India.
Looking ahead, the second half of this year will no doubt be uncertain for investors, with a backdrop of political and economic risks; elections, persistent inflation and central bank policies. This will challenge market participants on many levels.
For investors to successfully navigate bond markets during this time, they need the tools and data behind them to make effective decisions. While many are already using some of these tools today selectively, we expect to see much wider adoption across investor-types and markets going forward as they seek new ways to remain competitive in challenging markets.