Fixed income
As in other asset classes,
the shift towards passive
investing is also a major issue
in fixed income markets.
Longer execution times,
higher execution costs
and increasing difficulty
sourcing bond securities and completing large trades have
driven investors to seek alternatives – including ETFs, according
to research published in September by Greenwich Associates.
The previous month, BlackRock reported that Australian
investors increased their inflows to fixed income ETFs by 41%
over the 12 months to August 2016. Meanwhile, Deutsche Bank
stated that the Asian corporate bond market represents an
opportunity for the development and trading of fixed income
ETFs, due to the presence for the first time of “sufficient liquidity”
in September 2016.
The impact of central bank policies continues to be a significant
factor in fixed income markets. Between 2008 and 2016, the
major central banks have
increased their combined
total assets from $6.4
trillion to 17.6 trillion; some
observers have questioned
whether this may have
a damaging effect on
liquidity. Meanwhile, some
buy-side firms have noted
that they have as many as
16 different work streams
to be compliant with the
European
Commission’s
MiFID II regulation. Globally,
bond markets are diverse;
while in Europe and the US,
there is an ongoing drive
to push more trading onexchange, driven by the
likes of Dodd-Frank and EMIR and the G20 agenda agreed
in Pittsburgh in 2009. In other markets as much as 88% of the
market is still traded OTC. Buy-side participants at the recent
Asia Buy-side Forum debate in Singapore did not see any
likelihood of that changing in the next five years; furthermore,
there are significant concerns that the level of transparency
surrounding exchange-trading would in any case be a bad
idea for liquidity in parts of the Asian bond markets.
October 2016
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