The TRADE predictions series 2023: Fixed income

Participants from Overbond, TransFICC, MarketAxess, FlexTrade Systems, JP Morgan, Tradeweb and LTX predict how fixed income will advance over the next year.

By Editors

Vuk Magdelinic, chief executive officer, Overbond: Conditions in global bond markets paint a bleak picture heading into 2023. If spreads continue to widen, financial conditions tighten and volatility remains high, central banks will need to consider whether the deterioration in corporate bond liquidity warrants measures to shore up markets to stave off financial distress. Therefore, corporate bond market participants must ensure they’re getting the wide data coverage they need to create the full picture of market conditions that’s necessary to achieve best executable pricing.

To get the best possible prices, expect the continued adoption of AI algorithms to analyse pre- and post-trade data across numerous venues next year. Also, with so many high-quality corporate credit names losing massive value on their bonds – duration risk is going to be the name of the game in 2023. This is because numerous highly rated companies, including the likes of Apple, have embarked on issuing a lot of long dated debt with low coupons. As the Fed continues to increase interest rates heading into the new year, this debt issued by the big firms must be re-priced much lower for it to match what current market rates are.

Steve Toland, co-founder, TransFICC: Over the past few years many people have predicted that the fixed income market would consolidate. In fact, the opposite is true, with more than 170 fixed income electronic trading venues currently live (an increase of approximately 20 in the past year). In 2023 we predict that market fragmentation will increase, with the launch of more e-trading venues. Also, as dealers seek to manage trading costs, direct connectivity will increase, where dealers provide direct streamed prices as an alternative source of data and direct trading. Modular technology will drive the market forward, and we expect to see opensource technologies become used more widely in fixed income, as firms accept they do not need to build all the applications in their technology stack. Cloud adoption is another key trend. In the past two years there has been more acceptance that the Cloud offers the benefits of scalability, efficiency, and reduced costs, and that it can be used for trading asset classes that are less sensitive to latency. With increased efficiency a key requirement for all trading firms, modular technology solutions, built in the Cloud for maximum scalability to meet evolving functionality, will be essential to the evolution of the Fixed Income market during 2023.

Raj Paranandi, chief operating officer, MarketAxess EMEA and APAC: The last 12 months have resulted in some of the most volatile and challenging liquidity conditions the bond market has faced in recent memory. Recent periods of volatility have created a greater desire from market participants to innovate and adapt to new approaches in the market. In fixed income this has continued to drive electronification and the use of data to enable transparency in decision making. We continue to believe that all-to-all trading is an essential mechanism to allow investors to navigate stressed market conditions, where there may otherwise be liquidity shortages.

Stefano Dallavalle, fixed income product manager, EMEA, FlexTrade Systems: The adoption of EMS technology will continue to grow into 2023, with the streamlining of execution workflow driving efficiency in fixed income emerging as key drivers for the buy-side. The next 12 months will build upon existing automation to see additional protocols and destinations made available to smart order router (SOR) strategies to deliver improved choice and flexibility of execution to the buy-side. Additionally, bilateral dealer connectivity via EMSs will offer a disruptive alternative to the established RFQ workflow of many desks and will continue to grow into 2023. The EMS’s ability to combine these connections with other data points available to the buy-side and to offer a consolidated pre-trade view of the market while providing intelligent automation capabilities will become crucial in 2023. As a result, I predict that fixed income EMS solutions will emerge into mainstream use and become a mission-critical tool for bond desks, similar to their use in other asset classes.

Alex Nowak, head of Continental European FICC e-Sales, JP Morgan: Since more than one-third of the institutional clients we surveyed in JP Morgan’s FICC e-Trading Survey at the end of last year suggested liquidity availability and price transparency were their key concerns entering 2022, we focused on enhancing the tools provided to clients to navigate these markets and to reinforce cross asset systematic trading capabilities. Due to the benefits clients received from real-time monitoring tools in FX spot and how it impacted their usage of orders versus risk-transfer, we see rising demand for more functionality and interactive capabilities in FX and at the same time greater pre- and post-trade transaction cost analytics in fixed income and commodity markets in 2023. These solutions will come via bank-specific and third-party channels to enrich the execution decision process and address the increasing data needs of traders and portfolio managers alike as well as the data scientists who support those trading efficiencies. Algos are set to continue to grow by volume in FX due to sophisticated decision-making processes supporting best execution requirements and new demand will arise for these orders in areas like US Treasuries, which are starting to see new solutions developed. Government bond trading will broadly witness changes to trading protocols aided by improved streaming pricing, similar to FX Spot, helping clients with price discovery, reduce information leakage and serve as a steppingstone towards more algorithmic trading solutions.

Chris Bruner, chief product officer, Tradeweb : The electronification of the credit market is truly taking shape and we’re seeing a unique change beginning in that space. In 2023, expect to see more focus on large-scale risk transfer in credit as opposed to single security trading. As the tools and analytics needed to make this kind of trading more efficient becomes available, expect to see more portfolio managers adopting this approach. Large-scale risk transfer will represent a fundamental shift in the structure of the credit market as traders increasingly view it as transferring baskets of risk with a desired set of characteristics. Packaging up trades provides investors with greater certainty that trades will be executed and when you combine this with the rise of automation, we know we’ll be seeing a lot more of this kind of trading in 2023. 

Jim Kwiatkowski, CEO, LTX (a Broadridge company):

The capital markets industry experienced a particularly volatile 2H 2022 as investors grappled with a looming recession and peak inflation. This year will be remembered as the year when market participants were forced to adjust to a drastically different environment due to a hawkish approach from the Fed, the war in Ukraine and persistent supply chain issues altering the trading landscape. The US corporate bond market was not unscathed by these challenges, which will continue to have ripple effects well into 2023.

We expect the Fed’s tightening of monetary policy to continue, with the process ending in the first half of 2023 and interest rates and inflation remaining relatively high throughout the year. We expect high rates and recessionary concerns to continue to hold back the new issue market. Amidst these conditions, the availability of secondary market liquidity will be a key challenge that market participants will continue to solve for in 2023. We expect to see electronic bond trading reach record levels with the employment of innovative artificial intelligence (AI) and technology that increase transparency while minimizing information leakage. We also anticipate the further adoption of advanced trading tools for more efficient e-trading of large orders.