Fixed Income Trader's Priorities for 2022
As we move toward 2022 there are positive signs of economic recovery within the Fixed Income US market. Across the financial services industry, equities prices and global economic growth are on the rise and sustainability is very much top of the agenda for investors, especially following the 2021 COP 26 summit in Glasgow.
WBR released a new FILS USA event benchmarking report – Direct Connectivity, ESG, LIBOR, and Strategic Priorities for Fixed Income in 2022 - highlighting the challenges that Fixed Income Trading Heads are facing in 2021 due to the impact of the COVID-19 pandemic, and the innovative solutions that buy-side firms are implementing.
Here is a snapshot of some of the key findings from our FILS USA benchmarking report.
96% of our survey respondents said they would like to trade in emerging markets - but their buy-side organisations are also challenged by this. Emerging markets, especially in Asia, are presenting investment opportunities for fixed income traders due to the high earning growth and variety of technology stocks currently available.
However, our respondents noted, there are a number of investment challenges in this asset class such as higher levels of complexity and higher fluctuations for example. When we asked our respondents to elaborate, some said that "emerging markets have opportunistic returns but lack predictability" making them a high-risk investment.
“The opportunity to diversify portfolios by investing in emerging markets can be very appealing but it does carry risks.” Said Irene Cerequaglia, Conference Director, Fixed Income Leaders Summit USA 2021, “Emerging markets are also starting to be associated more and more with ESG. The governance element of ESG has always been part of the emerging markets, DNA when it comes to risk assessment, but the link to the ‘E’ (environmental) and ‘S’ (sustainability) is not that obvious which adds pressure on portfolio managers to integrate ESG metrics in their portfolio construction.”
At the beginning of 2021, the sustainable debt market was valued at over $1.7 trillion, making it imperative for Fixed Income traders to continually monitor growth. Historically, ESG information providers have tailored their output for equity investors. More recently, debt-related offerings have been developed to enable greater transparency which is central to its success.
Fixed Income traders will have more confidence in choosing the ESG score and data offerings that best suit their existing investment processes if they are transparent about how their scores and data are calculated. 70% of our survey respondents are currently using only one product for ESG scoring and data. In the future, we can look forward to ESG information providers perhaps expanding their current offering to include more buy-side services, such as data modelling and analytics, and tailored data feeds.
Our survey revealed that there has been an increase in openness and interoperability in Fixed Income trading, as buy-side firms strive to increase their alpha and gain access to more opportunities. 71% of our respondents believe that pre-trade transparency on bonds is crucial for increasing the universe of instruments transacted in the market.
Increased transparency creates a favourable environment for building new instruments. Our survey respondents agree, saying that pre-trade transparency can enhance decision-making accuracy and create momentum for new instruments.
Nonetheless, increased transparency may not always be enough - in many situations, a whole lot of data is required to support an organization's efforts. In any case, greater transparency will ultimately lead to siloed data moving in the right direction as well as providing more product opportunities.
“Addressing the opaque nature of the traditionally bifurcated Fixed Income markets will greatly benefit the buy-side and will increase the pace of evolution towards a more efficient market structure with greater transparency and execution choice.” said Michael Koegler, Managing Principal, Market Alpha Advisors LLC.
Final Thoughts
In the new era of hybrid working, it's fascinating to watch how heads of Fixed Income are investing in areas that make them more agile and efficient, as well as investing in improvements to generate alpha and reduce their operating costs.
If you want the full story on the current fixed income landscape and traders' priorities, download the full report – Direct Connectivity, ESG, LIBOR, and Strategic Priorities for Fixed Income in 2022.