European credit markets: Transparency still challenging post-crisis

Published on 27 July 2020

Calmer markets should lead to better transparency however, streaming dealer prices in the corporate bond market today do not reflect traded prices as accurately as the buy side would like.

In March markets became dysfunctional and despite encouragement from banks towards direct, bilateral trading the sell-side proved cautious in trading on risk when faced with such volatility. In July, post-crisis, buy-side traders still see spreads, liquidity and transparency in the European corporate bond market as weaker than in February, notably in the Sterling investment grade market.

Sharon Ruffles, head of fixed income trading at State Street Global Advisors, says that initiatives like the proposed European consolidated tape would improve, but not solve, the transparency challenge. Her firm is using new trading protocols such as portfolio trading along with traditional voice trading and depth of experience to support investors in these challenging markets.

Dan Barnes Welcome to Trader TV, I’m Dan Barnes. Joining me today is Sharon Ruffles, head of fixed income dealing at State Street Global Advisors, to talk about the liquidity picture and transparency in corporate bond markets today. Sharon, welcome to Trader TV.

Sharon Ruffles Hi, Dan, thanks for having me.

Dan Barnes So tell us, how would you characterize liquidity in the corporate bond market at the moment, and how have we got there from the volatility we saw in March?

Sharon Ruffles So I think just to sort of start off with where we were in March; markets were watching corona virus, so I don’t think they were accepting that this could be as big a thing as it turned out to be. I think we sort of hit that point on around 11th of March, when we saw sort of spreads start to blow out quite considerably. And throughout the course of that week, I can honestly say trading was extremely difficult, trying to sort of ascertain where levels were and what prices were really looking like, really to the point where I would say markets became dysfunctional. In the lead up to that, banks had been really encouraging us to think about portfolio trading, new ways of coming to market and dealing with banks directly. This looked like it should be the ultimate time to do that, but actually, this was the time when the banks were really like, ‘whoa, hold on a minute. I’m not necessarily sure that I want to take down all this risk in this environment.’ From there to now, I mean, obviously, we’ve had four months. Most of us have been working from home, but we learned to work in a new normal. And I would say that actually markets are very, very much supported by central banks and the intervention that they did, which was colossal and really sort of made that kind of V-shape retraction of that widening of spreads. So we’re probably about two thirds of the way back. But, you know, markets, I wouldn’t say, are in any way where they were before. So we’ve still got very illiquid markets and we’ve still got wide bit of the spreads and we’ve still got some very unloved bonds out there.

Dan Barnes You mentioned that price discovery is quite challenging. Has transparency improved in the market since then?

Sharon Ruffles I’d like to say yes, I don’t think it necessarily has. I think we still struggle with really seeing where the prices are coming into us and assessing that vs reality. So when we think about TCA analysis and best execution and how we’re going to be able to demonstrate that to, either internally or to our clients externally, what we’re really looking for on the buy-side is some clarity of pricing. When markets are volatile and moving very, very quickly, that can be very difficult for dealers to stream those prices. So that’s one way of looking at it and saying, ‘OK. Volatile markets, we accept this over the counter to the market. You’ve got dealers, market makers out there putting risk on the table. So you understand that maybe they don’t move in as quickly to get those prices out there as they possibly could be. When markets are calmer, We really should be seeing more transparent pricing coming through. So we really should be able to get a sense of where prices are in reality from a streaming perspective, and then be able to go into some of these electronic platforms and lift or hit those streaming prices. And that’s not happening as much as I think we on the buy-side would like it to happen.

Dan Barnes The European Union’s playing a consolidated tape for fixed income of post trade data. Do you think that sort of utility would help in the markets will that not be detailed enough to actually support the trading process?

Sharon Ruffles I mean, you can argue it’s different horses for different courses. It depends what you want it for and what you want to use it for. One of the things that you would want it to do is to feed into your pre-trade analysis and feed into that pre-trade transparency. But of course, the consolidated tape is just historical. So I think from the perspective of, where is liquidity? Where has liquidity been historically? What does the volume in these in this particular security look like? All of that will be really, really useful information, but there’s still an overlay that needs to be on top of that.

Dan Barnes Are there any parts of the market, which look challenging from a liquidity or price formation perspective at the moment?

Sharon Ruffles If I had to call them all out, it probably would be the sterling market. I mean, obviously, you’ve got your high yield market, but I think historically we know that that can be a little bit sticky just by nature of the asset class. But the sterling market, I think, in contrast to, say, the European investment grade market has really become a technically driven market. We’re not really seeing any new issuance coming in, so there’s a lot of demand for bonds that are already very, very well placed, and so that secondary market trading activity is really low.

Dan Barnes At the moment are there any particular ways you’re affecting best execution for your investors?

Since the onset of the crisis, I think we’ve had to look at all different ways of trading. I spoke a little bit earlier about portfolio trading, and I think where we see value in doing that and where it made sense, we’ve certainly made use of that style of trading. And then obviously the age-old, let’s all go back to the voice and forget about trading on electronic platforms,’ that’s a natural reaction, particularly in volatile markets. The idea that a dealer is going to stream prices all day long, in all sorts of sizes onto an electronic platform, simply isn’t going to happen in that sort of level of volatility. And, of course, algorithms are going to be switched off. We’ve got a very experienced trading desk in terms of tenure, and I think that really came into play because the prices that are coming through, are in no way reflective of perhaps what you saw yesterday, perhaps where that bond was marked an hour ago. So you can be in a situation where you’re trying to trade something and the price looks completely way off of where you would have expected to see it. And so being able to make those judgments, I think, is where the experience of a trader really sort of comes into its own.

Dan Barnes Sharon, that’s been great, thank you.

Sharon Ruffles Thanks for having me, Dan.

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