US portfolio trading volumes have more than doubled this year as the rapid electronification of corporate bond markets is encouraging more investors to buy and sell large blocks of bonds in one go.
There were US$802bn of portfolio trades in US corporate bond markets in the first nine months of the year, according to Tradeweb’s analysis of TRACE data, up from US$389m in 2023. Portfolio trading accounted for a record 11% of US corporate bond trading volumes in September, up from just under 5% at the start of last year.
That comes as a growing number of investors are adopting portfolio trading as a convenient way to reshuffle their exposure across credit markets, ranging from asset managers to hedge funds and insurance companies. Banks have been investing heavily to cater to this demand, with some starting to offer clients the ability to execute cross-asset trades by including other instruments like municipal bonds and mortgages in portfolios alongside corporate debt.
“We've made significant investments globally in electronic trading, which are uplifting the entire credit ecosystem,” said Sonali Theisen, global head of FICC e-trading and markets strategic investments at Bank of America.
“We're making portfolio trading more data-driven to ensure we’re focused on the right signals and information. This is also driving improvements in portfolio optimisation and is helping us to earn more bilateral, solutions-oriented risk transfer trades with our clients," she said.
Electronic trading has revolutionised the way corporate bonds are traded and organised in recent years. The growing prevalence of algorithms to price bonds, along with the emergence of exchange-traded funds as an outlet for offloading risk, has helped trading volumes across US corporate bond markets increase by around 50% over the past five years, according to Coalition Greenwich.
Portfolio trading has come to typify this shift towards a more equity-like trading paradigm by allowing investors to buy or sell hundreds of different securities worth as much as US$2bn in a short space of time – a feat that seemed impossible only a few years ago in these once human-dominated markets.
"There has been a shift in the way people contextualise risk in credit; there are now more equity-like calculations of beta [ie, how bonds move relative to the wider market]," said Theisen. "It’s now become something of an arms race on how to systematically recycle risk through the different strategies.”
Banks are devoting huge resources to keep pace with the fierce competition in this space, including from non-bank specialist trading firms like Jane Street. Technological prowess has fast become indispensable in a world where the speed at which trading desks respond to client enquiries could be the difference between winning a trade and being an also-ran.
“The benchmark keeps changing,” said a senior fixed-income banker. "If a client has a US$500m portfolio trade and everyone takes 30 minutes to quote, then that’s fine. But as soon as one dealer does it quicker – in 10 seconds, for example – then the bar changes and you have to get better and more efficient to stay competitive.”
Entering the mainstream
Investors certainly appear to approve of the direction of travel. Tradeweb has seen a roughly 20% annual increase in firms conducting portfolio trades on its platform in the first nine months of the year. Ted Husveth, manager director for US credit at Tradeweb, said traditional asset managers were initially the main users of portfolio trades, but it's now become widespread among the investor community.
"As it’s matured as a protocol and gained popularity as an execution method, the type of user has broadened to really be across the board: everything from traditional asset managers to systematic hedge funds, credit fundamental hedge funds and insurance companies," he said.
As portfolio trading enters the mainstream, the size and complexity of transactions that dealers can handle is also evolving. Theisen said BofA has been building the capabilities to enable multi-asset portfolio trading, sharing the resources and tools it has in credit with other areas such as mortgages and munis "in order to facilitate broader asset rotation for our clients".
That comes as other parts of the fixed-income universe are starting to migrate towards electronic trading. Kevin McPartland, head of market structure and technology research at Coalition Greenwich, said there has been greater e-trading evolution in the muni bond market over the past year or so.
“We expect the next 10 years will bring further electronification of less liquid fixed-income markets, such as mortgages, ABS and CLOs,” he said.