Skip to main content
The Globe and Mail
Support Quality Journalism
The Globe and Mail
First Access to Latest
Investment News
Collection of curated
e-books and guides
Inform your decisions via
Globe Investor Tools
Just$1.99
per week
for first 24 weeks

Enjoy unlimited digital access
Enjoy Unlimited Digital Access
Get full access to globeandmail.com
Just $1.99 per week for the first 24 weeks
Just $1.99 per week for the first 24 weeks
var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(select.open)}function setPanelState(o){dom.root.classList[o?"add":"remove"](select.open),dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){window.requestAnimationFrame(function() {var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))});}pencilInit(".js-sub-pencil",!1); // via darwin-bg var slideIndex = 0; carousel(); function carousel() { var i; var x = document.getElementsByClassName("subs_valueprop"); for (i = 0; i < x.length; i++) { x[i].style.display = "none"; } slideIndex++; if (slideIndex> x.length) { slideIndex = 1; } x[slideIndex - 1].style.display = "block"; setTimeout(carousel, 2500); }

Expectations of a borrowing deluge from corporates globally are turning bond market attention to a little-known tool that’s already helping smooth trading of illiquid debt the way exchange-traded funds (ETFs) did years ago.

The innovation, known as portfolio trading, involves bundling several bonds into a single package to trade. Once unwieldy and time-consuming, tech innovation is rapidly turning it mainstream.

More significantly, the strategy may have earned its stripes during the coronavirus-linked market mayhem.

Story continues below advertisement

During volatile times, trading in corporate bonds and other risky assets can dry up, forcing sellers to slash prices. But market participants have reported several instances when even debt from stricken hospitality and travel companies, packaged into bond portfolios, smoothly changed hands.

Cumulative portfolio trading volumes globally on bond trading platform Tradeweb topped US$100-billion in June, rising from just over US$2-billion when it launched portfolio trading for U.S. investment grade and high yield bonds in January, 2019. The cumulative total was almost US$51-billion in January, 2020.

It executed 54 portfolio trades in Europe in March, compared with 19 in February and 15 in January.

“We have been doing [portfolio trading] a lot more since March and that’s because it reduces the size of the outright risk associated with a one-way trade on a single bond,” said David Arnaud, a fixed income fund manager at Canada Life Investments.

In a portfolio trade, an asset manager picks a basket of securities to buy or sell, then analyzes them on various metrics such as liquidity, inclusion in ETFs and transaction size.

Once constructed, an order is sent, either directly to counterparties or over trading platforms, which quote a price reflecting the value of all the securities the portfolio contains.

For some, this complements fixed-income ETFs, which allow investors to trade baskets of securities simultaneously.

Story continues below advertisement

But a portfolio trade can make liquidity pools available to a wider array of bonds, even those not in ETFs. It can be useful for investors who want, for instance, to trade off a single factor such as duration or credit agency ratings.

The tool proved handy for Andrew Falco, global head of FX and fixed income trading at Fidelity International. Seeking higher exposure to longer-maturity debt, Falco’s team used it for a “very decent sized transaction,” he said.

TIME, COST, REGULATION

The trend is gathering speed in world corporate bond markets, worth more than US$10-trillion. Robert Simnick, credit portfolio specialist at Invesco Asset Management, told a recent conference he had executed nearly 130 portfolio trades in the past two years, with about 100 bonds in each.

“There were a couple of guys doing this last year and now I have a whole portfolio trading chatroom dedicated to this kind of trading,” Mr. Simnick added.

A survey of 49 European investors by consultancy Greenwich Associates found 40 per cent planned to execute portfolio trades in the coming year or had recently done so.

Technology has allowed the trend to gather speed by computerizing a process that previously relied on spreadsheets and manually inputting data. In an electronic format, a portfolio trade becomes a much easier “workflow” for a dealer because the bonds are already in the system and can be grouped together more easily than was previously the case.

Story continues below advertisement

Mehmet Mazi, global head of debt trading and financing at HSBC, said pricing and transacting several hundred bonds now takes just a couple of minutes.

“The first portfolio trade we did a few years ago took three weeks because we didn’t have the technology, we had to do it manually,” Mr. Mazi said.

The strategy, like others, isn’t perfect. Some traders said it stalled at the height of the March turmoil, when even the highly liquid U.S. Treasury market and ETFs were seizing up.

But several factors may drive its growth.

For one, corporate borrowing is soaring, with companies likely to take on US$1-trillion of new debt this year, Janus Henderson predicts.

Guy America, global head of credit trading at JP Morgan, expects the tool to grow with the underlying market.

Story continues below advertisement

Then there’s regulation, more specifically MiFID II rules requiring post-trade transparency and proof of best execution.

Chioma Okoye, European credit product manager at Tradeweb, said an asset manager can ask up to three dealers to quote a package price for their portfolio. All quoted prices, for the package and per bond, are shown on Tradeweb, making it easy to prove “best execution” to clients.

Finally, Kenneth Monahan, a senior market analyst at Greenwich Associates, said estimates suggest investors using portfolio trading can cut execution costs roughly in half. “I believe that credit portfolio trading will have profound effects on market structure,” he said.

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.

Follow related topics

Report an error
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies