Building resilient strategies for a volatile interest rate environment

Published on 17 June 2024

Jim Switzer, global head of municipals at AllianceBernstein, discusses the challenges, or rather, impossibility of trying to predict markets this week. With the backdrop of volatile interest rates, wars, and political uncertainty, Switzer unpacks how his firm builds portfolios and trading strategies that are resilient to the fickle climate.

Given the complex world of muni bonds, the global head also discusses how his team is leveraging technology and thinks “systematically” when it comes to its strategies.

In this episode, Switzer also talks about the importance of customization on the desk, how AB has used tech to cut costs and drive efficiencies, and his views on the invaluable need for traders to have tech skills.

Finally, in our extended show, the global head unpacks his views on how he sees execution management systems transforming the future of the fixed-income desk.

Interview Transcript:

Jo Gallagher Welcome to Trader TV This Week, your insight into trading desks can prepare for the week ahead, I’m Jo Gallaher. Today I’m joined by Jim Switzer at AllianceBernstein and we’re here at FILS in Boston to discuss the main topics and events leading this week. Welcome to the show.

Jim Switzer Hi, Jo, thanks for having me.

Jo Gallagher So to kick us off how to train best be preparing for the week ahead.

Jim Switzer I think the first thing you do is you get your magic eight ball out of your drawer and you ask it what to do. But in all seriousness, we saw the fed on hold last week. We saw a better inflation number last week. So I think the trend is holding that. We will see rate cuts this year. But keep in mind timing this is impossible. It’s going to happen when it happens.

And for us, it’s just getting the directionality right. Leaning on our economist forecast understanding no landing, soft landing, hard landing stagflation. There are a lot of outcomes here. We have geopolitical tensions around the world, the unipolar world moving to a bipolar world, which is interesting and a potential, you know, looming debt crisis. I think the most important thing is structuring your portfolio correctly for those kinds of events.

Jo Gallagher Exactly. So how do you build a portfolio that’s resilient to this rate environment?

Jim Switzer Rates have a lot of effects on a lot of different things. When we’re building muni portfolios, and I run the municipal bond business at AllianceBernstein, you know, we’re thinking about four core contributors to performance. It’s duration and getting duration correct, which is very difficult. And duration is really led by the direction of rates and the sensitivity to interest rates. It’s also curve structure. And how do we position the portfolios along the curve.

We have a very large barbell on because we think the intermediate part of the curve is expensive. The third thing that we’re looking at is we’re looking at taxable versus tax exempt. And fourth is just credit. And all of those are going to contribute in different ways. And they’re all going to have different outcomes depending on, you know, the direction of this landing if you will call it. So they’re all very important.

Jo Gallagher Exactly. And so then how do you build a trading strategy that expresses those views?

Jim Switzer It really depends on the asset class that you’re talking about. You know, in municipal bonds we’re talking about an incredibly fragmented asset class 50,000 obligors, and a million CUSIPs. It’s a high-quality space but a very complex space. So we think about this very, very systematically. So we’re using data aggregation tools. We’re using optimization engines. And we’re using market connectivity tools to be able to navigate that. And keep in mind we have a very large SMA business. And that means we’re managing 29,000 accounts.

This is not a hedge fund managing one portfolio or an asset manager managing five mutual funds. But we’re managing, you know, 29,000 individual accounts, which is a very complicated thing. So leaning on technology to be able to do that is crucial to be able to deliver performance.

Jo Gallagher Given that we’re at FILS. How is your firm’s relationship with technology and automation evolved?

Jim Switzer First of all, this stuff is hard. The tools that we built are very difficult to do. It wasn’t, you know, 6 or 7 years ago that we didn’t think of ourselves as having fintech skills. We thought the barrier to entry was very, very low, but we’ve since learned otherwise. A big part of our success is building the skill sets, the necessary skill sets in the business, on the trading desk, on the portfolio management team that could actually understand and communicate with the developers and understand the power of these tools that we were trying to build and would deliver.

You know, we sit here at FILS and we talk about build versus buy all the time. And first of all, I don’t understand how you can buy something and you won’t have a build component with it. There has to be a build component with us. And for us, building just enables us to build things that are connected better, that are more flexible, better, that open architecture that we can continue to modify as we move forward. So that’s a really important part of it. In the bottom line, the muni market is very fragmented.

We’re trying to do a lot of trades. You know, we went from 17,000 trades in a year in 2019 to close to 300,000 trades, our run rate for this year. And that’s not because we’re adding people, you know, brains and eyeballs to the problem. Quite the contrary. We’ve gone from five traders to three traders and we still been able to do that. And that’s really technology and the ability then to take those two traders to our innovation team, where we continue to evolve our thinking and our tools.

Jo Gallagher Super, super interesting. So where do you see the greatest potential for growth and evolution when it comes to accessing and sourcing of liquidity?

Jim Switzer A big theme at the fixed Income Leaders Summit is execution management systems. There were some polling numbers yesterday where they were asking people, you know, what’s important, and they were 5 or 6 options. Then it was more automation and more of this and more of that. And the thing that jumped out of me is that everything they asked you couldn’t do without EMS technology. So I do think that’s the future.

My belief is there’s an interstate highway network, if you will, where it’s direct connectivity, firms sell side and buy side can, you know, it’s like a toll road can jump on to this highway and be connected with every trading venue, with every sell-side firm, instantaneously. Be agnostic to what platform on their in their own ecosystem. I know this can work because we actually live in it now.

And the question is, will the industry come around to thinking about it and adopt it and creating this more dominant network, which really, when the network effect plays out, will really help in terms of more systematic approaches. If we ever get to blockchain, it’ll be easier to deliver. That’s a dream of mine. We’re living in it, and I think it’s possible.

Jo Gallagher Thank you, Jim, for joining us.

Jim Switzer Thank you very much. Appreciate it.

Jo Gallagher I’d like to thank Jim for his insight and of course, you for watching. This has been Trader TV This Week.

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