The Bond Markets operate fundamentally different to equity markets...

The Bond Markets operate fundamentally different to equity markets. There are certain key factors to note:

  • The World Bank estimated Global Equity Markets to be valued at US$65 Trillion in value, and Global Bond Markets to be valued at US$135 Trillion in value. That is known Bonds.

  • The majority of cash bond trading is OTC market based.

  • This means there are multiple potential pricing for exactly the same instruments depending upon the source.

  • Bond markets are global by nature, an issuer in Australia is not only competing against other Australian issuers, but every other issuer.

  • Regulators have introduced rules that professional investors can only invest in issues with a credit rating.

  • Yield curves are based on On-The-Run issues, which are composed of the most liquid issues.

  • Bond market analysis is based upon cash flows and the ability of an issuer to generate cash to pay interest on their bonds and buy back at maturity.

  • This is fundamentally different to equities where analysis is based on expected future earnings.

  • Bond markets are therefore often a very good leading measure of equity markets.

Key Issues:

  • Fixed Income Markets 30 Year Bull Run could be coming to an end, though this has been market conjecture for some time.

  • However Bond Markets are still the largest source of investment funding, and the markets are twice the size of equity markets.

  • Historic low interest rates have made other financial instruments more attractive but also because the sheer range of Bonds available has created illiquidity for many issues.

  • This reduces price discovery especially when comparing Bonds for investment. But this is changing…

  • It also means that owing to the global nature of fixed income markets, Bonds are for many now also a Currency Play.

  • An example is in 2015 Chinese issuers have switched from RMB to Euros while maintaining a similar level of US$ issues.

  • Regulators believe lack of market transparency and unregulated trading in OTC markets are a systemic market risk.

The Regulators Approach

  • More regulation, especially for reporting of trades.

  • Move from publishing Indicators of Interest (IOI) to publishing tradable prices only.

  • As the majority of IOIs are sourced from Banks who provide these prices free of charge because they are trying to either build or unwind a position, the transition to tradable prices is likely to increase data costs.

  • Increased electronic trading and reduced voice/hybrid trading to increase transparency.

  • Ironically this could decrease transparency and liquidity in the short term.

  • Both the above places greater emphasis on the market data aspect of financial markets as well as introducing market data governance.

  • Central reporting of all OTC trades via approved Clearing Houses.

  • More recently it has been proposed to ban commissions on trades, this would have a major impact on financial markets mechanics.

What is happening in the Market Place?

  • IDBs and Exchanges are setting up OTC clearing businesses, and the key aspect is a focus on taking the data they receive and create a market data business in this sector.

  • The intention is to sell data based on last traded prices, volumes, instrument types historic data, issue data and analytics. Trading clients will receive this data free of charge, but others will need to pay.

  • There is considerable question marks over the models that have developed for CCP data for Interest Rate Swaps. CCP data is currently fixing type data and not real time. IRS along with NDFs have been in the forefront of CCP.

  • IRS and Bond markets are very closely linked as both are effectively interest rate products.

Practical Application or Evolution?

  • Unlike the Exchanges these Clearing Houses will not see the Full Order Book as they will not have access to tradable prices, and as there are multiple venues, i.e. IDBs, Direct interbank trading and Exchanges any access to tradable prices will be limited.

  • Sourcing data will require greater discrimination.

  • Major impact will be on provision of following price types:

  • Reference Data

  • Intraday Traded Prices

  • Corporate Actions & Fundamental Data

  • The emphasis will be on the comprehensiveness of the overall data coverage and packages. This is in terms of entities packaging the data, as well as those sourcing the data.


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