New Pathways to Emerging Market Opportunities
Sovereign bonds for developed markets reached an inauspicious milestone last month when the yields on every single European 2-year benchmark government bond fell into negative territory. Europe, of course is not alone in its run of record-low yields. Major markets around the world, from Japan to the U.S. are all experiencing historically low yields as the COVID-19 pandemic continues to push investors into safe havens.
The same cannot be said for emerging market bonds. The ICE BofA High Yield World Sovereign Bond Index, for example, which consists of several emerging market sovereign bonds, states its USD equivalent yield around 6.5%.
That’s an important distinction for fixed income investors who need to source both liquidity and yield as the pandemic lingers. Fortunately, thanks to advances in trading technology, many of the traditional barriers to accessing and efficiently trading emerging market fixed income have disappeared, making emerging markets now just as accessible as established markets for fixed income investment managers around the world.
The Right Time for Electronic Emerging Markets
Tannia Munroe, Director and Emerging Markets Product Manager at Tradeweb, recently sat down to talk about this evolution with TraderTV, where she explained that the perfect storm of technology development and market disruption have created a groundswell of interest in emerging market bonds and derivatives.
“Two big things have happened this year to push emerging market fixed income to the forefront of investment managers’ collective consciousness,” Munroe said. “First, market participants have developed a much greater reliance on technology as the pandemic accelerated the move to electronic trading. At the same time, clients have become much more flexible in terms of their investment approach in this world of negative real rates. That’s making the emerging markets space much more attractive.”
Proving her thesis, year-to-date on Tradeweb, emerging market fixed income trading totaled over $742 billion.
Breaking Down Barriers to Global Trading
Technology has played a major role in making that possible. Prior to the advent of electronic trading, market participants looking to access emerging markets faced a litany of liquidity and workflow challenges that often created insurmountable obstacles.
“Disparate systems, language barriers, dozens of different counterparties that include not just traditional large global banks, but also local banks and their clients – these were all major challenges to emerging markets trading that new trading protocols have addressed,” Munroe explained.
She pointed to all-to-all and portfolio trading protocols as two major advances that have made it practical for participants to access emerging market fixed income markets from anywhere in the world.
Efficiency Wins the Day
Since launching in Q1 of 2019, Tradeweb has seen a 300% increase in the number of portfolio trades that include emerging market line items through Q3 2020. The number of portfolios trading entirely in the emerging markets space has also increased substantially as more Tradeweb clients embrace these protocols. To-date roughly $1.3 billion in emerging market-only portfolio trades have been executed on Tradeweb.
Having taken the early lead in transforming international investors’ access to China’s onshore bond market through Bond Connect, Tradeweb now offers an additional direct access channel via electronic RFQ trading on Tradeweb CIBM Direct Link. Volumes for Chinese bonds so far this year have surpassed $249 billion.
Emerging markets derivatives trading has been another source of significant growth over the course of 2020. A total of $432 billion of the total volume executed in emerging markets on Tradeweb this year was in interest rate swaps. Likewise, $50 billion was traded in emerging market credit default swaps. Here again, Munroe credits streamlined workflows with making this possible.
She noted that the interest rate swaps space was another example where newer, less traditional protocols, such as request for market (RFM), in which a client can ask for a two-sided quote, are becoming very popular.
“We have over 350 clients on Tradeweb currently active in the emerging markets space, and that’s really being driven by a demand for more sophisticated tools and streamlined capabilities to trade multi-asset securities. Clients are looking for access to new streams of liquidity and diversification, but they’re also looking for faster response times, certainty of execution and efficient workflows. That’s where we’re really changing the game at Tradeweb,” Munroe concluded.
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