COVID-19 has sent shockwaves through the global economy, most notably in the bond markets. Historically regarded as a low yielding but conservative investment, corporate and government bonds have typically been a safe haven for those looking to lower their risk profile. But as the pandemic took it’s grasp country by country the bond market froze… Over the counter markets rely on people being willing to trade, in a time of rampant uncertainty fear had set in and investors of all kinds were reducing their capital commitment to trading in order to manage their budget. The markets were uncharacteristically volatile and illiquid – more akin to what we would normally expect in the equities market.
But not for long… the world’s major sovereign policymakers together have injected a USD 9 trillion fiscal stimulus, more than USD 4 trillion of additional quantitative easing and a USD 8 trillion boost to the M2 money supply. This swiftly restored confidence in the credit markets and added yet another layer of debt to the world’s balance sheet. This in hand with low interest rates and reducing inflation rates again positions the bond market as a more favourable option for investors. And let’s just be clear… it’s not all COVID driven. When chatting to our good friend Adam Parry – ex bond trader he said, “when I was trading Bonds in 2006, I could pretty much get a two way price in 100m for a 1 tick bid offer spread… three years later it was 5m and a 5 tick bid offer”.
On September 20th 2020 the FT reported that the bond market and banks were ‘at odds’ as the banks were setting aside billions against bad loans but the bond market was suggesting there would be a dramatic recuperation. A banks reserving process is bound by complex economic models, accounting rules and a growing body of regulations. In contrast the bond markets are driven by supply and demand.
This raises an unpleasant possibility for the banks: that accounting rules and regulation mean that they will struggle to offer companies funding at prices competitive with what is available in the bond markets. And we don’t need to tell you how important lending is right now… Banks now have a seemingly higher cost of funding for underwriting credit risk than other providers of capital. If this continues to be so, bond markets stand to take market share away from banks over the long run.
However, the inherent problem with trading bonds is the lack of price transparency, unlike the equities market they are not bound to the exchanges and most bond trading is via an inter-dealer broker (IDB) who can carry out trades anonymously. Lack of transparency in what is predicted to become an even more volatile market is not favourable – which forces the demand for IDB market data.
The major IDBs have recognised this lucrative profit line and have invested heavily in their market data businesses. An industry which was once dwindling on the vine is now seeing a resurgence as they increase revenues from this reliable new revenue stream. Through diversification they have been able to acquire new businesses and grow their market share.
But the age-old market data issue still murmurs… cost! If you check out our blog ‘Why pay more’ we discuss that across all types of market data consumer there is a desire to unshackle themselves from the incumbent providers, legacy technology stacks and complex integrations. People want to consume market data whenever they want, however they wish and across any device. The same principles apply to IDB data – and in fact it’s two-fold as often the data the IDBs are packaging up and pushing out partly derives from the banks original data and trades in the first place.
There is a prime opportunity for an open marketplace which welcomes all of the major IDBs to commercialise their growing data sets and provide accurate insights on a more flexible commercial arrangement.