A ‘landmark’ transaction in the bond market last week could set a precedent for fixed income trades to become more transparent and liquid.
Mark Holman, a managing partner at TwentyFour Asset Management, said the ‘over the counter’ way of trading bonds has meant trading lacks transparency – as it is not done via exchange – while making it tough to source the best pricing.
However, there was a bond trade last week that used the ‘Bid(s) Wanted in Competition’ (BWIC) process, which meant there was extra transparency and ‘enormous liquidity’ provided in a short space of time, in one of the ‘least liquid’ areas in fixed income.
Usually, the BWIC process is used among large-size portfolios in the asset backed securities market, but has rarely been used in the broader fixed income space until recently.
He said: ‘A portfolio of deeply subordinated bank bonds in €, £ and $ totalling nearly 600 million across just a handful of names came to the market via a BWIC with 2 days’ notice.
‘The bid-offer spread on the bonds would typically be around 1% and they would normally only be quoted in no more than a million or two a side.
‘The seller was a not a traditional fixed income investor, but a speculative owner looking to book profit (a good example of the rotation trade that is gathering a lot of press at the moment). Ultimately, virtually the entire portfolio traded at mid-market or higher with no signs of weakness in the market thereafter.’
Holman said the BWIC method meant this trade did not cause the volatility it could have done.
‘In our view, it is this transparency that the market really needs and once we have more of it, liquidity will become less of a problem.
‘If it catches on in broader fixed income, the next stage could be that potential buyers look to use an OWIC (Offers Wanted in Competition) to help them source those bonds that are not offered widely on dealer inventories.’