TABB says bond demand sparks new structures, technologies

By Jennifer Chiou

New York, Sept. 13 - TABB Group said in a report that the corporate bond industry faces a level of demand among asset managers far greater than issuance, thus leading to the adoption of new structures and technologies and a rise in equity-style, fixed-income exchange-traded fund use.

According to research analyst Henry Chien, TABB estimates that trading in U.S. corporate bond ETFs accelerated during the first half of 2012, accounting for average daily bond volumes of $262 million, specifically $146 million in the investment-grade and $116 million in the high-yield market.

"As corporate bond ETF trading accelerates," Chien, author of Corporate Bonds and the ETF: Odd-Lot Arbitrage, said, "unique liquidity dynamics and information flow of ETFs will increasingly impact prices and trading behavior in the underlying bond markets."

He added: "Still, you have to look deeper into these trends. There's rapid product innovation, dynamic-trade technology and constant new arbitrage opportunities emerging in the ETF universe."

TABB said that fixed-income ETFs are being considered by institutions as a replacement product for credit default swaps. In addition, bond market participants are paying closer attention to ETFs now that bonds moving into the ETF universe - whether in creation or redemption baskets or any ETF-eligible issuance - are seeing a noticeable difference in liquidity as bond traders anticipate the impact of ETF market makers.

"As regulatory forces, mainly TRACE, Basel III and the Volcker Rule, dismantle the dealer-driven, principal-based market structure, ETFs may be a key component in the interplay between institutional and retail flow and the move towards a live-price environment for certain bonds," Chien said.

"ETF flows are increasingly impacting the price of constituent bonds directly, especially in the high-yield space. At TABB, our data suggests that bonds in high-yield ETFs tend to outperform comparable bonds as ETF inflows rise."

With offices in New York, London and the Asia-Pacific region, TABB is a strategic advisory and research firm focused on capital markets.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.