How do you translate a fixed income view into an actual trade, from identifying the opportunity through to execution?
That process comes from collaboration across multiple teams – if the fixed income view is driven by a top-down strategic allocation (whether that’s by region, industry, rating, duration and so on), we screen the corresponding sub-investment universe for potential best risk-adjusted opportunities. This is primarily driven by the initial credit risks, including tail risks, expected credit dynamics, liquidity opportunities and relative valuations.
Our screening is both quantitatively and qualitatively driven with our in-house credit research reviewing potential opportunities for validation before the global high yield portfolio management team assesses the security’s market risks (considering beta, correlation, sizing). Input on liquidity and implementation will come via our trading desk which also manages price discovery and monitoring for alternative opportunities.
When the opportunity is driven more from the bottom-up, our credit research provides recommendations which are then risk reviewed by portfolio managers. This is done to assess their potential implementation within our portfolio construction, risk manage position sizing and classify trade purposes between (beta adjusted) carry, active (total return) and tactical, underlying the nature of the expected outperformance, before being implemented by our trading team.
How does the trading process differ when you’re dealing with high yield bonds, where liquidity can be much more variable?
We have a highly experienced and skilled trading team that enables us to access liquidity through all market conditions. The trading process does not differ significantly, however the high yield market does require a detailed understanding of the credit risk, patience, and price limits being in place to maximize the trade valuation or trade volume combination within the portfolio manager’s objectives.
We use the trading teams’ expertise and understanding of high yield markets conditions, credits, flows, and their relationships with our core counterparties, to help access the required liquidity. To manage large flows, we often use portfolio trading, to swiftly capture market liquidity and implement large trades.
When market liquidity changes quickly, how do you balance getting the trade done with protecting execution quality?
This is when our strong counterparty relationships come to the fore. We collaborate extensively with partners at the global tier one banks, and those relationships extend beyond day-to-day trading into strategic cooperation. That way, when conditions deteriorate, we can expect surety of liquidity and fair pricing to execute on our client strategies. It’s also important that the portfolio manager and trading desk communicate effectively and regularly throughout volatile periods, to ascertain whether trades continue to suit our strategy as prices shift around.
What are the key points in the trading process where technology or data is genuinely changing how fixed income desks make decisions?
Pre-trade analytics have improved substantially – both in terms of probable price as well as market impact and whether a trade print will negatively impact other holdings. Large scale quant data platforms such as Bloomberg BQUANT can give deep insights into which way risk appetite in the market is skewed, whether that’s by duration, ratings quality and cyclicality.
This can provide investors with guidance as to what direction the market is likely to travel as those trades are sought after and executed. For example, over the past few months it was clear the market was more heavily skewed to buy short end securities; this has contributed to curve steepening. Astute investors can gain insight by monitoring the trades the market is seeking to execute. Pre-trade analytics can also help fund managers make more realistic and informed decisions without information leakage risks, such as disclosing potential trades to the market.