Investor appetite for emerging market bonds has elevated electronic trading levels

Published on 12 November 2020

The demand for greater returns in the fixed income space has led investors to look at emerging market (EM) debt more closely. Interest rates in these markets typically offer better yield than in much of Europe or the US, but it can be more challenging for investment managers to access the right opportunities.

Tannia Munroe, director, emerging markets product manager at Tradeweb, says that the volume of portfolio trading with EM line items has grown by 300% this year, while electronic trading of fixed income derivatives is also increasing, with over US$110 billion of volume in EM interest rate swaps in Q3 alone suggesting that many investors are using electronic trading to overcome barriers to access in emerging markets.

The fragmented nature of fixed income liquidity married with a far wider set of brokers operating across the whole range of EM markets can add cost and complexity to trading in EM fixed income, suggesting that the increased efficiency that electronic trading is leading to an evolution of execution in this space.

Dan Barnes Welcome to Trader TV, I’m Dan Barnes. Emerging markets are looking increasingly attractive as an investment target for fixed income investment managers. However, trading in emerging markets can be challenging. Today we’re talking with Tannia Munroe, director and emerging markets product manager at Tradeweb, to discuss some of the challenges of trading fixed income bonds and fixed income derivatives electronically in EM. Tannia, welcome to Trader TV.

Tannia Munroe Thanks for having me, Dan.

Dan Barnes How’s the appetite for emerging markets fixed income trading changing at the moment?

Tannia Munroe 2020 has certainly been a unique year. I think we’ve seen participants have a greater reliance on technology and have had to become more comfortable with it very quickly. The pandemic has really accelerated the move towards electronic trading. Additionally, from an investing standpoint, clients have had to really become more flexible in terms of their investment approach. In this world of negative real rates, the EM space is becoming a bit more attractive. Things like EM sovereign debt that could potentially yield a bit more are seeing more players in the space.

Dan Barnes And what sort of challenges do traders face trading in emerging markets versus developed markets typically?

Tannia Munroe I think all markets really are still faced with a bit of a liquidity challenge, right? Traders are also faced with workflow challenges using many disparate systems. They’re receiving information from many different sources that has to be synthesized. There are also best execution challenges. If you look at the EM space, you’ve got a couple of extra unique challenges; you can have language barriers, you’ve got many more counterparties, because not only you’re dealing with the traditional, large, global banks, you’re also dealing with local banks and local clients, pension funds, investment advisors, hedge funds.

Dan Barnes And how do you see those challenges, such as liquidity differences, vary between the cash bond markets and the derivative space?

Tannia Munroe In the cash market there’s the unique challenge of just the sheer number of bonds available on the space, and that can make liquidity seem a little harder to access. There is no concept of trace, so price transparency is also quite an issue in that space. On the derivatives side, it’s a bit different. You don’t have quite as many counterparties, but you do have issues around pricing consistency. And we’re hearing that from clients that they’re becoming very, very interested in knowing, what are the hit rates on the platform, what are the culprits? This has really resonated with them.

Dan Barnes And where do you see electronic trading making an impact in EM today?

Tannia Munroe I think the biggest impact really is on accessibility. The advent of all-to-all trading has made it possible for more counterparties to interact. You now not only have the large global banks, but you also have global players that have access to each other as well. We’ve seen an increase in the number of clients on the platform; we’ve got over 350 clients transacting across all of our EM products now. So we think that this ease of onboarding is really helping and making a big impact in the space.

Dan Barnes And typically we think of global players as having connectivity to all the electronic platforms. Of course that may not be true for some local markets, where the local and regional dealers might actually be the dominant players. Does that make a difference to the development of electronic trading in some of the EM spaces?

Tannia Munroe Absolutely! It’s certainly made it more challenging, but I think, again, in this era of working from home and the lockdown has really sort of accelerated the need for those players to be piped in just as well as their global counterparts. And so, we’re actually hearing directly from some of those players that would like to participate more, for help with connectivity.

Dan Barnes Which trading protocols, specifically are supporting bond traders in executing EM and hard-currency orders?

Tannia Munroe There’s been a lot of new, exciting protocols recently that have come to market. You’ve got the advent of all-to-all trading, you’ve got automated trading. But I think the one that’s really resonating most is portfolio trading; it’s this concept of trading a large number of bonds as a basket on the net proceeds basis. And clients have often used this as a way to manage their fund inflows or outflows, to alter the risk profile of their fund. But now, more and more, we’re seeing clients use it as an alternative protocol, so in instances where certainty of execution becomes very important, this protocol is very relevant, because for portfolio trading we see at least 95% of the portfolios trade in their entirety. And in the EM space we’re seeing a huge increase in portfolios that are not only blended portfolios so investment grade that include EM line items, but also EM only. We’ve seen about a 300% increase in volume of portfolios that have EM line items this quarter.

Dan Barnes And what developments are you seeing in the swap space in emerging markets?

Tannia Munroe Swap space also have some newer protocols being used or protocols that are less traditional. For instance, requests for market, known as RFM, which is basically a client coming in and asking for a two-sided quote – that’s become pretty popular on our platform. The regulatory environment in that space also has made it so that electronic trading is almost an imperative. Cleared volumes have increased exponentially. At Tradeweb we’re really using that as a way to inform our decisions in terms of what other EM currencies in the swap space we’re going to support. And the increase in volumes is really showing in client demand. In Q3, we did over $110 billion of executed volume in EMIRS.

Dan Barnes Wow, that’s amazing. Putting these ideas together, then, what sort of evolutionary themes do you think you can see for the development of electronic trading in EM?

Tannia Munroe I think clients are going to demand more sophisticated tools. They’re going to want more streamlined capability to trade multi-asset securities. They’re going to want to have faster response times and certainty of execution, which is going to continue to be a huge theme, I think, next year. I think platforms such as Tradeweb that offer a holistic solution and make the entire process more efficient, really stand to do well in this environment.

Dan Barnes That’s been a fantastic. Thank you very much.

Tannia Munroe Thank you for having me. Dan.

Dan Barnes I’d like to thank Tannia for her 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 or ETFTV.net.