Generating trade ideas in an unpredictable rates environment

Published on 30 August 2021

Buy-side bond traders have seen the effect of rate changes in the US across the global markets. It has been hard to navigate the Federal Reserve’s moves, and asset managers and buy-side traders have seen volumes in rates and credit drop – particularly over summer – impacting liquidity in some bonds.

It is often harder for traders to show ideas to portfolio managers in these circumstances, but Mike Nappi, director for investment grade trading at Eaton Vance, tells us how his team have been supporting investment decision making – and therefore investors – over this period.

Dan Barnes: Welcome to Trader TV – your insight into trading for professional investors. I’m Dan Barnes. Joining me today is Mike Nappi, director of investment grade trading at Eaton Vance. We’re going to be looking at the year so far in terms of central bank activity, its impact on the government bond space and that impact on the rest of the bond market.

Mike, welcome back to the show.

Mike Nappi: Thanks for having me back, Dan.

Dan Barnes: So we’ve seen central bank activity get very lively this year. What effect does that had on the rates market in terms of volatility of volumes?

Mike Nappi: It’s been tricky to navigate, for sure. I think, you know, we’ve been in this mode where most of the market thinks we’re going to have a higher rate environment. We certainly started the year heading in that direction. No one wants to be early on that call, obviously. But you know, here we are kind of right back to where things started more or less. We’re seeing it in the credit markets, having this real low yield, kind of all-in-impact, where if you thought investment grade spreads weren’t appealing before, they’re certainly less appealing now.

Dan Barnes: We’ve seen volumes as far as I can see, drop off somewhat from Q1 to Q2. Obviously in summer, we expect some changes too. What’s it look like from your perspective and how much does that impact the volatility and liquidity?

Mike Nappi: From a credit volume standpoint, it’s been a pretty boring summer. Our volumes are down. I think most of the sell-side volumes are down, and in a lot of ways it was a good sanity check for us. Often you wonder, is it just us or is it the market right now? And I think what’s exacerbated that feeling is the last few years there’s been so much volume in particular in the summertime when you think, OK, things are going to slow down, where it really has been what it would be, prior to 08, considered a normal summer, after it feels like a decade of, you know, volume year round.

Mike Nappi: I think some of that’s coming out of the election. Obviously, that was going to generate some vol as well. And so, you know, kind of in between election cycles, looking at inflation numbers, not necessarily sure what direction the market wants to go. Most people, I think, are taking a wait and see approach. Flows are still strong in the investment grade space. New issues still strong, you know, 17 deals yesterday. Well through kind of this week’s estimates, that’s kind of been the trend for August. We were forewarned, I think, by the banks that, hey, we’re going to see some stuff go forward here. So it’s been orderly, but it’s definitely been a little dull for sure.

Dan Barnes: We’ve seen a lot of discussion around what’s happening in terms of market structure as well, whether there needs to be any reform following all the sell off in March last year. Do you guys have an opinion on reform of the US Treasuries market or the credit markets or where there might need to be any change?

Mike Nappi: Top of my mind has been transparency and reporting in the credit space.

Dan Barnes: Mm-Hmm.

Mike Nappi: You know, one of the things I think that’s stalled with COVID-19 has been some of those efforts, right? It felt like we were, you know, on the cusp of seeing some changes there. FIMSAC (Spotlight on Fixed Income Market Structure Advisory Committee) had some proposals out. And obviously, there’s a lot of talk in the new issue space and a little more transparency there as well, but we don’t really know what that’s going to look like. So yeah, for certain.

Dan Barnes: OK, that’s great. Thank you. And then finally, how are your traders actually achieving best execution for clients and how are they actually generating potentially alpha for clients in this slightly low volume and depressed market?

Mike Nappi: I think showing portfolio managers ideas, it’s just getting harder and harder as much as it is for them to generate ideas and for us to find ideas because everyone you know, it’s ‘group think’ right now. And I think it’s ‘group think’ across a lot of asset classes. So we certainly try to pick spots, maybe some curves trades, some names that you know are 200 off and we like at 130 off. Is it really worth owning these type of names, so we’ve been pealing out of some names that have come in.

On the best execution side? Look, it’s certainly been a challenge not necessarily to achieve best execution, I think we do a very good job there. I think we’ve seen our transaction costs continue to collapse. The one thing I would say we’ve done more of this year, and you see it a lot in the news, is portfolio trading. We found it to be a very valuable tool. You know, you get an inflow overnight and you’re looking at one portfolio and there may be a few names you want to add. They are not attainable on a name by name basis, but if you just take everything up a little bit, you can do that. So we’re very pleased with the execution we’re getting there. You know, it gets a lot of publicity, but I think rightfully so.

Dan Barnes: That’s great. Mike, thanks very much.

Mike Nappi: Thank you, Dan.

Dan Barnes: I’d like to thank Mike for his insights today, and of course, you for watching. To catch up on our other shows or to subscribe to our newsletter, go to TRADERTV.NET.