What’s been the main topic of conversation on your desk over the last month?
One topic is that US data has been surprising to the upside and the economy has remained resilient. We’re watching economic data closely because they can give indications on when the Fed could act on their rates decision. While a cut is clearly not happening at the next meeting, the stronger than expected data has caused volatility in rates, therefore filtering down to other markets that impact our investment decisions.
I trade fixed income across the credit and local markets; the daily treasury moves impact prices across the markets and can have meaningful influence on daily market sentiment. While yields have been higher for longer than anticipated – some expected cuts by now this time last year – there have been opportunities for investors.
Asset allocation is an important and timely topic. For example, there are all in yield buyers that are stepping into US investment grade (IG) where others are deeming spreads too tight for their mandates and moving to other markets. We’re watching these technical trends closely because of the effects it could have on our portfolios and execution process.
How would you describe the make-up of your desk?
We’re a global trading desk, operating 22 hours a day, six days a week with offices in London, Hong Kong, New York, and Cape Town. This allows us to have seamless worldwide coverage over the course of all market hours across regions.
At Ninety One, we are cross trained in multi-assets with individual, specialised expertise. The handoff between our desks is smooth because we underscore the importance of communication. My colleagues and I are in constant dialogue. There are times we debate the best course of action on high touch trades. In these instances, our backgrounds and experiences come together which enables us to find the best course of action to strive for best execution.
We also meet weekly as a global desk to discuss operational issues and debate process among other topics. As a unified desk, we’re able to work off one another to make the tricker situations easier.
What does the current liquidity landscape look like and how are you navigating this?
Emerging market (EM) credit liquidity is typically less predictable than US IG and high yield (HY). Much of that liquidity differential is driven by volatility and primary activity in each market. For example, we have seen an uptick in EM primary this year which in turn helped secondary liquidity. Due to heightened potential volatility surrounding the Fed and its impacts to EM, dealers have been closer to neutral on their balance sheet (i.e. more risk neutral).
While dealers do use some of their balance sheets there are subsets in the market, like LATAM corporates, that are more illiquid. As traders, we are part of the investment process from the get-go; paper trades look attractive in theory but they’re nothing if they’re not executable. From there, it’s my job to understand my investment teams’ agenda and what the urgency and willingness is from my PMs to get the risk on. This is particularly important if the market is more directional, thus making communication, again, key. There can be price discovery involved and screen levels are not always tradeable levels. If there are limits, how rigid is it or is it more dynamic as the market is fluid?
In a given situation where we have a need to unload or load on bigger than social sizes, I like to start off by looking at axes and seeing if anything suits with a reputable counterparty I have trusting interactions with. The partnership is key because I have to trust them to manage the order to minimise execution costs and price movement while also being timely should the market backdrop change. Part of the ingredients for a successful relationship is active information sharing, understanding our motive for the outcome of the trades and a mutual respect for each other’s opinions during the process.
What market structure developments are set to be most impactful throughout the remainder of this year?
The SEC’s T+1 mandate is undoubtedly the biggest topic at the moment. It has wide ranging implications across the global markets. We’ve been discussing the ramifications of the difference in settlement dates in each equity and fixed income markets. The mandate is more clearcut for equities but the issue that arises here, for global managers, is the mismatch in settle dates between different regions: what is its effect on funding and how much of a cash drag there would be on performance?
Fixed income is less clear cut in that there’s room for interpretation. The issue lies with the different settling avenues (Euroclear, Depository Trust Company or Clearstream) for a given USD denominated credit. SIFMA has now come out with a recommendation to treat US starting International Securities Identification Numbers (ISINs) as all T+1. Prior to that, it was unclear whether clients such as ourselves would subject bonds held in Euroclear to T+1 as it falls out of the SEC’s scope.
In anticipation of the change, we are taking additional steps and precautions to mitigate what we expect to be elevated fails across market participants.