Concessions in primary rates markets are creating investment opportunities

Published on 3 August 2020

The European Union’s €750 billion rescue package is having a massive impact on rates markets, with peripheral European country debt looking more attractive. Concessions in the primary rates markets, as a result of the debt issuance that governments are using to support their economies in the face of COVID-19, are also creating investment opportunities.

Liquidity is very challenged in the secondary market, but that requires investors to be smarter about how they interact with it, says Andrew Mulliner, head of global aggregate strategies at Janus Henderson. Buy-side trading desks and sell-side dealers have proven that investments in electronic trading have paid off, while investment firms with strong trading desks are reaping the rewards through enhanced access to the market.

Dan Barnes Welcome to Trader TV. I’m Dan Barnes. Joining me today is Andrew Mulliner, head of global aggregate strategies at Janus Henderson, to discuss trading opportunities in the rates markets, and particularly the impact of the new 750 billion euro, European Union, rescue package. Andy, welcome to Trader TV.

Andrew Mulliner Thanks for having me. It’s good to be here.

Dan Barnes So tell us, how has the 750 billion euro rescue package for the European Union impacted opportunities in the market today?

Andrew Mulliner It’s without doubt a really big deal for the rates market. The main opportunity is really kind of amplified, because I think it was there already, was the appetite for peripheral government debt markets, particularly Italy, Spain, Portugal, all have benefited a great deal from this show of solidarity.

Dan Barnes And generally, how do you see opportunities in both primary and secondary rates markets today?

Andrew Mulliner You know, primaries are normally not that exciting in the rates market, but actually with all the government supply we’re seeing at the moment, it’s a great opportunity. And what’s been really notable is the amount of concession you get in some of these markets when governments are trying to issue large amounts of bonds. You know, investors aren’t necessarily adverse to buying them, but we do want to see some sort of concession, some sort of cheapening, and we’ve seen some pretty substantial opportunities there. So if you can get in these primary issuance, you can you can make a decent amount of money just by riding that concession and then riding it back in again.

Dan Barnes How about in the secondary markets right now?

Andrew Mulliner Secondary liquidity has been pretty challenged, frankly for a while. You know, it’s still not great. Obviously, it depends on the market, Italy saw a notable fall in liquidity compared to what we’d have been used to five years ago, 10 years ago. Over the last four years it’s been much less liquid, and that remains the case. But you can obviously transact, so you just need to be smart about how you do it.

Dan Barnes Whenever we see the liquidity challenges, typically we think about there being a bit more back and forth between the trading desk and the portfolio manager. But in this sort of work from home environment, presumably the interaction between the buy-side trading desk and portfolio manager is quite different. How’s that functioning?

Andrew Mulliner It’s been one of those ones where you didn’t really know how it was going to go when we were all sent home back in March. But it’s worked a lot better than I think most of us expected. And the main reason is technology. And the fact is that calls like this or really just the more pressure in use of instant messenger, getting on the phone very quickly, the fact that all of our systems are online, essentially means that we can capture the same things we really value when we’re interacting with our dealing desk. So, in fact, it’s not really been that much of a challenge, apart from, of course, when the inevitability IT issues happen.

Dan Barnes Absolutely. And has the sell-side been able to get out to the market, there’s been no challenges in terms of engagement with the outside?

Andrew Mulliner No. And I think, again, it’s a fortunate habit of the market. We’re already moving to using instant messenger a lot more than necessarily picking up the phone, people required to be at the desks, etc. So from a technology perspective, we’ve been able to actually just crack on.

Dan Barnes Given all the competition in both the primary and secondary markets right now due to the tighter range of opportunities that exist, what’s that doing to the liquidity picture? And as an investment house, how do you ensure that you’re able to engage with the sell-side to capture that liquidity, whenever possible?

Andrew Mulliner Janus Henderson’s always had a dedicated dealing desk for as long as I’ve worked there, and that’s going on almost 15 years now. So, as always, it’s a relationship business, however much you try and shape it up as other things. Your relationships with the sell-side really matter when you’re on the buy-side, and our dealing desk basically take care of that. So we’ve got really strong relationships across the street. We’re able to leverage those when we need to get access to liquidity. I mean, for the most part, liquidity is not that much of a problem, but when you really need to access it, that’s when your relationships count, but that’s where we’re strong.

Dan Barnes Andy, thanks very much.

Andrew Mulliner You’re welcome.

Dan Barnes I’d like to thank Andrew for his insights and of course, you for watching. To catch up on our other shows go to TraderTV.NET or ETFTV.NET.