Supply in Q1 2021 was second only to 2020, with plenty of demand for bonds and opportunities in the market for traders with the right reflexes and investment processes in place, such as big names with bonds trading at 80 cents on the dollar.
Tim Kurpis, head of investment grade credit trading at AllianceBernstein, says fewer opportunities – and concessions in new issues – meant more value was seen in secondary markets although primary still took up a lot of buy-side workload on the trading desk.
With good workflows across trading, portfolio management and risk, plus investment in technology such as execution management systems, can create the efficiencies needed to seize the right investment opportunities – or speed alpha in AllianceBernstein terminology.
Dan Barnes: Welcome to Trader TV – your insight into trading for professional investors, I’m Dan Barnes. In March, we saw a lot of new issuance in the investment grade credit market in the US and of course a lot of secondary market activity as well, which rivals the activity from last year when there was a sell off. Joining me now is Tim Kurpis, head of credit trading at AllianceBernstein. We’re going to talk through some of the market movements and how his team manage best execution on behalf of their clients.
Tim, welcome to the show.
Tim Kurpis: Glad to be here.
Dan Barnes: So, as I said, we saw a loss of investment grade issuance in March. How busy was the credit trading desk?
Tim Kurpis: March was the fourth biggest month of issuance we’ve ever seen, just behind those three months we saw last year. And if you look at it, it’s just continuing kind of what’s been a very busy start to the year in IG supply. Q1 supply is actually the second busiest it’s ever been, again only to last year, so it’s been kind of relentless. And when the supply gets going like that, it really is all hands on deck. And then in the secondary market with the backup in yields we’ve seen, I think you’ve seen tons of cash coming in the market and we’re looking to take advantage of some of that ourselves. The Verizon deal had the biggest order book we’ve ever seen, so there’s plenty of demand out there for bonds. And there’s definitely some interesting things going on, too. I think for years we’ve talked about how with yields rallying the premiums that bonds are trading at, now we’re talking about with the rate back up, bonds are trading at a discount, so you can have AAA-rated names like Google, Apple, Amazon that have long bonds that are trading at 80 cents on the dollar. We think that looks really interesting. So taking it all together our desk had plenty to sink our teeth into and we were pretty busy.
Dan Barnes: What was the balance between primary activity and secondary activity?
Tim Kurpis: Over time our primary/secondary split ends up being kind of 15-20% primary, with the rest being secondary. And in March, a couple of things I think drove that where that we didn’t really see outsized opportunity in the primary market, and I think if you look at the composition of the names, most of the new issue concessions that came wasn’t that interesting versus what we were finding in secondary. March and April of last year, 40% of our volumes were in primary, so we were doing a lot in primary, but you were seeing blue-chip companies issue with 50-75 basis point concessions, which looked really attractive. That’s not really the nature of the supply we’re seeing in March.
The one other thing I think is interesting is despite only 15% of our flows coming from the new issue market, the split in terms of time spent was way more balanced between primary and secondary, and I think if you talk to anybody on the buy-side, what you’ll hear is a major pain point is that the primary market is incredibly inefficient. The process is the same we’ve been doing for 20 years. I think that there are some positive developments coming in terms of direct books which we’re hugely supportive of, but it still remains a major pain point for the buy-side.
Dan Barnes: And then were there any liquidity or volatility challenges?
Tim Kurpis: There was definitely a bit of indigestion we saw, particularly in the beginning of the month. So with the heavy pace of supply, we saw the IG index back up from about 89 basis points to 100 basis points pretty quickly. So most of that happened over a three day period. But then kind of as supply slowed, we saw that eased and we actually closed the month pretty much where we started it. And then if you look at TRACE, despite the heavy supply we saw, dealers actually were net lifted in about a billion and a half of paper. So there’s just plenty of demand out there. The other thing I would highlight, and this happens normally when there’s periods of very heavy supply, is block liquidity can become a little bit challenging. It gets kind of hard to get people’s attention on an individual block axe when they’re spending all their time on primary. So what ends up happening is it becomes kind of difficult to line up trades in big size on stuff you want to do. I think the volumes overall in the market don’t drop. What you’ll see is that they end up being a little bit concentrated amongst the names that have issued into certain sectors and things like that.
Dan Barnes: Coming back to your point about direct books and some of the other platforms out there, as well like IHS Market, seeing those sorts of platforms developed will hopefully take the weight off traders’ shoulders in managing that process.
Tim Kurpis: Exactly. I think if you talk to the sell-side, it’s actually a pain point for them as well in terms of the current process. So everybody’s kind of working together to find a solution, which is very encouraging.
Dan Barnes: Yeah, definitely. OK, so how are your trading team delivering best execution on behalf of your investors over that period?
Tim Kurpis: Buying bonds in the primary can be a great way to ensure best execution, because you’re buying blocks of risk at attractive levels and you’re buying them in size. So one of the things we’ve been doing for years really is building up relationships with the capital markets and syndicate states. So what that does is help to ensure that we’re among the top in terms of allocations, but also we can help to drive pricing and structure. I think to be able to do this effectively. It’s not just the trading desks. You really need to have a good process built across your business in terms of integration with the PM teams, the research teams, the trading teams, often that has to be across multiple parts of fixed income. So for us, it’ll be our dedicated IG portfolios as well as our insurance, our high income or high yield, and our multi sector strategies. ESG and responsible investing is a focus for us, and we’re continuing to have active dialogue with both issuers and syndicate desks about types of names we want and the structures. But then it’s also putting your money where your mouth is and kind of leading with size, so that you can actually influence the types of deals that come to market and you can get an outsized allocation.
Dan Barnes: What sort of strategic decisions are you making right now to ensure that you can continue to get better execution for your clients in the future?
Tim Kurpis: A lot of it ends up being just continuing to invest in our technology. One thing we’re working on is building out our own EMS. We currently have it live on the municipal side, and we’ve been testing it on the taxable side as well. But I think the idea there is to have connectivity to all platforms from one central point of contact, and then we can do things like low touch trading and no touch trading, but we won’t rely on a third party provider and pricing service to be able to do it. We can do that all in-house. And within that, we can also potentially build direct connectivity to dealers as well. I think we’re talking about direct books and how we’re going to better connect to the syndicate desks. We’re also looking at how can we better connect to the secondary desks as well to make sure we’re not missing anything.
We’re also looking at building optimization engines, the idea there being is that you basically set up a machine to watch the market and all the incoming information you get and it’s going to highlight things that you want to do and maybe some things you didn’t even know you wanted to do. No human can watch the entire curve and say what’s the best bond to buy at any given time? So we’re trying to remove ourselves from being bond pickers and focus more on portfolio structure. In today’s liquidity environment, you really have to be the first one to notice some of these opportunities, so if you have a machine they’re highlighting and automatically sending orders to you. It’s what we like to refer to as Speed Alpha. It’s been a success story on the municipal side, so prior to us rolling some of these developments out, we used to do 1500 trades per month in March. We did 8700 trades and we did 500 trades in a single day. So we’re seeing this speed kind of take off in other asset classes and we think it’s going to be applicable to kind of our entire business.
Dan Barnes: Well, that’s fantastic. Really interesting developments there Tim. Thank you so much for your time, it’s been brilliant!
Tim Kurpis: Thanks for having me on.
Dan Barnes: I’d like to thank Tim for his insights today and of course you for watching. To catch up on our other episodes, or to subscribe to our newsletter, go to TRADERTV.NET.
