Will 2023 be the year of transparency in fixed income markets?

Geoffroy Vander Linden

If 2022 will be remembered for something in bond markets, it will certainly be the highest volatility and some of the most challenging liquidity conditions we’ve seen since 2008.  

Now the question on everyone’s mind is, what does 2023 hold in store for these markets? Volatile conditions in 2022 driving unusual bid-ask spreads have ultimately made it very difficult for market participants to operate as they would normally.  

Increased market transparency can be helpful at times like these and is what I think will be a driving trend in 2023.  

Transparency, to some degree, has always been part of fixed income markets – and it has certainly improved over time. But 2023 will be an inflection point for transparency as recent market turbulence once again underlines the urgent need for real-time data that helps participants see their way forward. It is what the market seeks and is what regulators are focused on as they look for ways to help capital markets function smoothly.  

In Europe, in particular, transparency is at the heart of initiatives to address, among other things, the current data quality and fragmentation issues in EU capital markets. For example, a fixed income consolidated tape which we would expect to emerge in 18-24 month will help bolster and deliver a strong capital markets union as Europe charts its own post-Pandemic recovery. This kind of regulatory evolution will only serve to drive more transparency into markets.  

To paint a picture of why this is important: if the market conditions we’ve experienced over the past year are a thick fog obscuring a windy mountain road, then pre-trade data is the powerful fog lights that help you see the way. In bond markets, a trade is important not just in its own right, but because it enables you to prepare for the next one.  

Against the backdrop of the equities sell-off this year, bonds are today more appealing to investors. Widened credit spreads along with increased base interest rates have pushed yields to levels not seen in years. With the current changes to the interest rate environment, investors would potentially be able to achieve more solid returns from credit instruments. And while the standard model of 60:40 equities to bonds has had one of its worst years on record, there is understandably more talk about reshaping portfolio construction by reviewing its weighting.  

This trend will once again boost the requirements for access to market data and the need for more market transparency in the bond market to support the changes to the investment pattern. These data-driven measures that boost transparency and indicate clear price action will only help investors capitalise on these opportunities and re-position themselves for the year ahead.  

Transparency also has an important role to play in the evolution of passive markets. BlackRock notably upgraded its forecast this year that it expects bond ETF inflows to triple to $5tn by 2030, as higher yields and uncertain markets push investors to diversify their portfolios.  

Bond ETFs are revolutionizing the way people invest in fixed income and have brought access, liquidity, and efficiency to many fixed income investors. Data-powered pricing, and pre- and post-trade reporting will help to entrench these products in the fabric of financial markets in the years to come.  

Technology that helps to deliver transparency is lightyears ahead of where it was during 2008 – technology that can help to determine accurate pricing like the MarketAxess Composite+™ pricing engine and provide liquidity metrics like MarketAxess Relative Liquidity Score.  

The power that transparency can bring in terms of market access will change the face of fixed income forever. Not only will we see participants show an increased appetite for new technologies and practices such as automation and Best Execution, long a staple of equities execution. But we will see a wider and more diverse liquidity pool enter the market, deepening and enhancing capital markets.   

Moreover, as bond markets continue to evolve and embrace newer initiatives like green bond secondary markets, a more transparent market with a wider base of investors will only help these new initiatives thrive.  

So, the question is will we see this level of change in 2023? At their heart sits the all-important theme of increased transparency. If we see this widely adopted across these markets, then the rest is bound to fall into place.  

 – Geoffroy Vander Linden, country head, MarketAxess Netherlands