Phil Steel, senior trader, convertible bonds, RBC BlueBay Asset Management
The market is already pricing in rate cuts in Q1 although I, along with many others, don’t believe they will begin before the end of H1. This uncertainty will lead to heightened equity volatility in 2024. On top of this, many more companies will need to refinance their bonds in 2024 than they did in 2023 and higher rates will make this an expensive exercise. Finally, the era of QE is well and truly over and the investment environment where “everything is going up” has disappeared with it. Investors will need to think far more about the risk profiles of their portfolios.
All of this points toward a good year for convertible bonds. When volatility rises, convertible bonds tend to outperform equities. Convertible bonds will also provide cheaper financing options to those companies with other types of debt coming due which will lead to greater primary issuance. This issuance will have higher coupons than the recent average, therefore benefitting equity investors with an income component greater than that of equities while the overall asset class continues to offer diversification to traditional fixed income investors.
Lara Shevchenko, senior policy advisor, market structure, FIA European Principal Traders Association (EPTA)
In 2024, we expect to see significant strides made towards opening up European fixed income markets to a more diverse range of liquidity providers offering the prospect of greater efficiency and lower costs for end-investors, due to more competition and the ability for more data driven trading decisions by the buy-side.
This past year has seen significant steps taken by policy makers to create a framework for enhanced fixed income transparency. The Mifir review has laid the path for the EU consolidated tape and empowered ESMA to make downward adjustments to fixed income deferral periods over time. In the UK, the FCA are prioritising the bond consolidated tape and will be rounding off the year with a policy statement setting out the proposed bond CT framework and also consulting on what we hope will be an ambitious new transparency regime for non-equity instruments.
These developments mean the industry will be well positioned to launch initiatives in the coming year, some of which already announced, which promise to reinvigorate European fixed income trading, bringing much needed impetus for growth. It will be more important than ever to support government bond liquidity in the current high interest rate environment and ongoing volatile markets. The bond consolidated tapes and revised transparency frameworks will do this by opening up fixed income markets to new competitors and innovation.
Jack Seibald, global co-head of prime brokerage services and outsourced trading, Marex
One of the more notable developments in financial markets over the past year is the shift into fixed income instruments. This is a direct result of the sharp rise in interest rates to levels not seen since before the financial crisis some 15 years ago, and the attraction of such returns to investors. We’ve even seen equity focused investors taking steps to access liquidity in bonds as an alternative.
We think that this trend is likely to be sustained or even accelerated in 2024. While a schism seems to have developed between the “higher for longer” and the “Fed easing” crowds as they consider the outlook for interest rates in 2024, it appears that the developing economic trends – weaker growth and some persistent inflation – have laid the groundwork for a sustained period in which fixed income will offer competitive returns and thus play a more prominent role in portfolios. The opportunities for investors in bonds ought to be particularly pronounced in the lesser credit-worthy parts of the market as sovereigns and corporates with substantial maturities find themselves having to refinance at materially higher rates.
Jo Burnham, risk and margining SME, OpenGamma
Institutional investor betting on yield spread fluctuations between US treasuries to make a fast buck have faced ballooning margin costs this year. The margin for one lot of two-year listed treasury futures surged from $330 in November 2020 to a staggering $1,265 as of 20 November 2023, reflecting an alarming 283% increase. Similarly, the margin for 10-year treasury futures witnessed a significant uptick, rising from $1,540 to $2,200 in the same time period, representing a significant 42% increase.
This is likely to compound a desire to hold cash in moving into 2024, which could affect the funding costs that face institutional investors looking to engage in the treasury basis trade, which involves taking positions in debt markets that seek to profit from changes in yield spreads between US treasuries and interest rate futures. Heading into the New Year, institutional investors face a more complex landscape as they navigate the trade-off between holding cash and using securities in a market characterised by higher interest rates. As the margin costs for treasury futures continue to rise, traders will likely seek new ways to adapt their approach to maintain profitability in an environment marked by shifting monetary policy dynamics.