September is expected to be an important month with “heavy issuance” says Mike Daley, vice president, and credit trader at T. Rowe Price, as traders are tentatively waiting to put their cash to work. In the upcoming week, Daley expects trading volumes to remain low as the summer slowdown continues and in the lead-up to Labour Day in the US.
The credit trader unpacks what to expect across markets over the next week and how his team is using execution protocols and macro credit tools to source liquidity in current conditions.
Daley provides a look at how portfolio trading is evolving across his trading desk and offers an in-depth view of how the fixed-income team is developing out its automation workflows and auto-response capabilities.
Interview Transcript
Jo Gallagher Welcome to Trader TV this week, your insight into how trading desks can prepare for the week ahead, I’m Jo Gallagher. Today I’m joined by Mike Daley, at T. Rowe Price, to discuss the main topics and events leading this week. Mike, welcome to the show.
Mike Daley Thanks, Jo. It’s great to be here.
Jo Gallagher To kick us off. What does the current liquidity environment look like and what can we expect from the upcoming week?
Mike Daley So, not surprisingly, secondary volumes drifted lower this past week as we head into the summer slowdown into the Labour Day holiday. Average daily volumes were down 15 to 20% relative to what we’ve seen over the course of the last month. My expectations are for that to play out again this week, with the new issue calendar basically coming to a halt. And again, a number of investors and market participants out to the Labor Day holiday.
Early estimates for supply this week are anywhere from 0 to 5 billion. So a significant slowdown relative to what we’ve seen over the course of the last several weeks. Expectations are for us to see a very heavy September new issue calendar. Over the course of the last five years. September issuance has averaged roughly 140 billion.
Early market expectations are calling for anywhere from 120 to 150 billion. So I think if we look at the seasonality coupled with the outlook for September issuance, we’ve seen an investor base that has been diligent in terms of their deployment of capital. Investors have been judicious with regards to adding risk in the secondary market. When yields move higher we’ve seen a return from all-in-yield-based buyers. When spreads move wider, we’ve seen a return of total return-based investors willing to put capital to work. But really, it’s waiting for supply and willingness to put cash to work when new issuance comes.
Jo Gallagher How are you specifically sourcing liquidity under these kinds of conditions, particularly given the rate volatility we’ve seen this year?
Mike Daley Really, it’s been a continuation of our execution protocols over the course of the year. Not much has changed over the last couple of weeks despite secondary volumes and liquidity incrementally moving lower. We’ve seen our blot risk transfer on individual Cusips remain constant as bid-ask spreads remain relatively tight and the cost of transacting there low. Likewise, across the portfolio trading channel, where more complicated trades that are going through the market continue to trade at relatively attractive levels where the bid-ask spread there also remains relatively tight and execution metrics for investors relatively attractive.
So our flows there remain constant as well. We have seen a slight uptick in some of our electronic flow, as credit vol has remained low and relatively anchored, the depth of algo bids and offers has been high, and execution metrics there have been pretty favourable for ourselves and other investors. I would quickly mention that across the macro suite of products, we have seen an uptick in our use up credit vol, where there have been some opportunities to add both upside and downside structures via hedging and just outright risk addition given changes in the vol backdrop. And likewise, we’ve added more risk via iBoxx TRS (Total Return Swaps). Given some of the dislocations in the funding there, where we feel like it’s been more attractive to add to the TRS product relative to cash. So not much has changed on the cash side, but we have seen an uptick in our use of products across the macro credit suite.
Jo Gallagher Just to expand on the use of portfolio trading, how do you see that evolving across your desk?
Mike Daley Yeah. So over the last year, we’ve seen an uptick in terms of more optimization based trades where we may be solving for certain risk objectives, for example, yield-based optimization. We will partner with a group of dealers to achieve that outcome, and doing so in a way that we have risk constraints and parameters in place. We use that to guide the type of portfolio construction that a dealer will provide back to us and then from there, we’ll partner again to achieve the best outcome for our clients.
Jo Gallagher How are you automating some of that flow on how do you also manage that during periods of high volatility?
Mike Daley From a secondary trading standpoint, electronic flow captures almost 50% of the daily trading volume that’s going through the market. And importantly, that flow has gotten more diversified and fragmented over the course of the last several years. To solve for that and capture the electronic flow.
We have an EMS (execution management system) in place that helps aggregate that liquidity across the different platforms for the trader, and it brings that liquidity to their fingertips. In terms of managing that, we’ve been partnering with third parties in the use of a third-party algorithm and some internal tools to respond to that electronic flow in a no-touch or low-touch type solution, where it frees up trader time to focus on more block-level type, risk transfer in the market and more alpha-generating ideas.
We have the ability to either throttle up or throttle down some of these no-touch solutions, meaning if the market feels weaker, we can tweak some of the automated responses to be in line with the weakness in the market. And conversely, we can also throttle up the algorithm or tool so that it is being more aggressive when the market feels stronger. So there is optionality from the end user standpoint to adjust to the volatility that is going through the market.
Jo Gallagher How are you looking to grow your automated workflow and auto-response capability?
Mike Daley Right now, it’s constrained more to RFQs (request for quotes) that are going through the market. But I think the goal again, as we think about liquidity, fragmentation, and different protocols, is to think about other means of executing electronically. You think about SWARMs, click to trade, live access through the market. If we can expand the use of automated responses where it’s not just limited to RFQ, and it’s able to engage the suite of the different protocols, that becomes pretty compelling. Where, again, the goal is to capture all of electronic flow in the market and do so in a way where it’s efficient and scalable across our platform.
Jo Gallagher Thank you, Mike, for your insight and of course you for watching. This has been Trader TV This Week.
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