ETF Replication Could Transform Bond Market Liquidity

ETF Replication Could Transform Bond Market Liquidity

NEW YORK, N.Y. – On December 18, the Bank of America released its newest credit investor survey, which outlined the major risks that investors are more likely going to face in 2020.

Based on the BoA’s survey, investors should brace for market liquidity in the coming year, which is considered as the biggest risk, and the second time it has become a major factor for investors.

According to an analyst and head of the European credit strategy at the Bank of America, Barnaby Martin, the spread has been tightening fast amid the FOMO behavior of the market has stayed prominent lately.

Martin further stated that in the coming year, there isn’t a lot of concern about inflation in the mind of investors. They are also not in focus on equity market correction or rising yields.

Going back to the credit markets sentiment at the end of 2018, it is not surprising that bond investors are staying focused towards liquidity, and the lack of liquidity in the market, noting that only around 1% of bonds are trading daily, with 32% of bonds are traded on five or less amount of days every year.

Previously in November, Matt King of Citi said that the recent advancements in the bond markets suggest that it is on the line towards massive changes in its landscape since some decades ago.


Also, according to King, portfolio trading can have a big potential in terms of revolutionizing how outflows are dealt with by portfolio managers. It can also possibly open a way towards broader factor trading, he said.

Portfolio trading has been a large focus in the market, which, according to many analysts, has the potential to modify liquidity, especially in the struggling bond markets.

The impact of these new initiatives on the liquidity on the market could be significant, especially if there is an increasing number of portfolio trades that are going to replicate ETFs.

King further pointed out that any bond can find a good bid right now, given than it can be presented as a part of a broader listing which replicates an ETF. He said that it is a “Tetris” effect where the resulting ETF conception trading effectively will zap the whole portfolio from the balance sheet of the dealer.

King further stated that these portfolio trade doesn’t need to replicate an ETF entirely, but a couple of bonds therein.

Further, CEO Rich McVey, stated that the use of ETF share trading in a much larger concept by both investors are dealers is one way of risk transfer in the bond market.

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