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A singular take a look at fixed-income buying and selling – Bond Purchaser

Paul Daley, managing director at BondWave, talks about fixed-income buying and selling in 2021 and appears forward to what could also be in retailer for buying and selling in municipal bonds this 12 months. Chip Barnett hosts. (12 minutes)
Transcription beneath
Chip Barnett: (00:03)
Hello, and welcome to a different Bond Purchaser podcast. I am Chip Barnett. My visitor is Paul Daley and he is the managing director at BondWave. And he’ll share his analysis and insights with us as we speak.
Chip Barnett: (00:18)
You already know, I believe we be speaking about a variety of topics of curiosity to the municipal bond market. So let’s begin off with 2022 by looking again at 2021. What sort of 12 months was it final 12 months for mounted revenue buying and selling?
Paul Daley: (00:38)
I might describe 2021 as a sort of a return to regular, Chip. Clearly 2020 was a wierd 12 months. It was a 12 months of outliers. When you take a look at it in distinction of 2021, in the event you take a look at issues like bid provide spreads, a typical measure of buying and selling in a market, we noticed some actually loopy stuff in 2020 for the plain causes. However for instance, on the finish of March, bid provide spreads had been as excessive as two and a half % for five- to 10-year municipal bonds, we noticed huge spike in quantity. Quite a lot of information pushed, clearly lots of COVID pushed, quantity buying and selling spikes. And so 2021 was very a lot the distinction the place we noticed issues like bid provide spreads returning to very regular sort ranges. We noticed volumes lowering and but liquidity didn’t essentially lower.
Paul Daley: (01:36)
The opposite factor that we noticed, I believe that was a little bit uncommon, surprisingly so on a very good facet, is that the brand new calendar was very, very sturdy in 2021. 2020 was sort of a file 12 months for brand spanking new issuance within the municipal market — and 2021 was only one% much less — so nonetheless the second highest degree of recent issuance that we would seen in our knowledge. So combining the shrinking of that secondary market, with the rise within the main market, means that lots of the brand new cash that got here into the municipal market was absorbed by the first quantity. And we did not see it essentially movement into the secondary quantity.
Chip Barnett: (02:19)
Particularly, how did municipal buying and selling carry out?
Paul Daley: (02:22)
It carried out fairly properly, truly, you realize, I simply described the situation the place you have received new cash coming into the market and it is being absorbed by main issuance and never essentially displaying up in secondary volumes. So you’ll suppose in that situation, that buying and selling prices could be elevated, proper? That is usually an outline of a low liquidity surroundings when you do not have lots of secondary buying and selling. However what we noticed as a substitute was that slippage prices, for instance, got here again to ranges that we had seen in in 2019, bid provide unfold prices additionally got here again to ranges that we had seen in 2019, considerably decrease than what we had been seeing in 2020. And that is additionally a really favorable comparability for a second cause — 2019 was sort of the bottom degree of buying and selling value 12 months that we’ve got in our knowledge historical past. So we have seen sort of this continuous pattern of decrease and decrease buying and selling prices, and this can be a pretty opaque market.
Paul Daley: (03:26)
In order that’s sort of an uncommon factor to see, however buying and selling prices have been on this secular decline. You’ve got received 2020, which is, you realize, the outlier pushed by, you realize, a world altering occasion, however 2021 very a lot returned again to that pattern of decrease and decrease buying and selling prices. So regardless of the truth that secondary buying and selling volumes weren’t sturdy in any respect, we noticed a continuation of the pattern of fine provide spreads, tightening, slippage, relative to different trades, so can into the volatility of buying and selling lowering and total, I believe it is simply an expression of the evolution of {the marketplace}. Despite the fact that we’ve got a really opaque market construction for mounted revenue buying and selling, we nonetheless have seen simply this continuous lower in buying and selling prices, which is a really, very constructive pattern, clearly.
Chip Barnett: (04:22)
Effectively, waiting for this 12 months, what do you see for mounted revenue buying and selling in 2022?
Paul Daley: (04:27)
So I believe I see a continuation of the pattern. I believe what we’ll see is a continuation of decrease buying and selling prices. The one exception I believe we’ll have is, my guess is that each one of that new issuance that absorbed new capital coming into {the marketplace} will now be expressed in secondary buying and selling. So you have received extra {dollars}, there have been extra bonds, so that you did not see as a lot secondary buying and selling. Now my guess is secondary buying and selling will cool off a little bit bit with a rise within the federal funds charge. You already know, so rates of interest going increased, we’ll cool off a little bit bit within the main market, however we’ll see a rise of exercise within the secondary market. And once more, that secular pattern will proceed the place we see decreased buying and selling prices. And that is in all probability about so far as I am keen to go on predictions — I am not a lot of a predictor, however I may also add in, I’ve a hope for what’s going to occur in 2022.
Paul Daley: (05:30)
And that’s that there will be a larger adoption of transaction value evaluation. Transaction value evaluation just isn’t properly adopted within the mounted revenue marketplaces. And that is primarily as a result of mounted revenue commerce knowledge may be very tough to eat. It is not essentially formatted simply. You’ve got received completely different commerce varieties blended collectively within the tape launched by the MSRB or the tape launched by FINRA. So what you actually need are instruments and calculations designed to extend the usability of the prevailing knowledge. And that results in one thing of a virtuous cycle. You’ve got received larger transparency with the brand new instruments and what the calculations you have received, extra understanding of {the marketplace} that results in much less concern of investing within the market, which ends up in extra investing, which ends up in decrease buying and selling prices. So I believe that, and I hope that, we’ll see larger adoption of know-how and calculation varieties designed to raised perceive {the marketplace} so that individuals might be extra snug investing within the market. So these are my, these are my hopes and my desires.
Chip Barnett: (06:47)
You already know, your analysis exhibits that commerce counts have been falling. What does this imply?
Paul Daley: (07:03)
Effectively, I do not imply suppose it means something that we needs to be too involved about. Actually commerce counts have decreased in 2021 relative to 2020, however 2020 was very tough, volumes had spikes that considerably due to the occasions of the COVID disaster. Individuals didn’t run away from the market in 2020, it was very actively traded. And I believe that is a direct results of proposed or introduced authorities intervention. One of many issues that we realized concerning the markets in 2020 was that within the time of disaster, you do not essentially want the federal government, the Fed, to step in and spend a ton of cash. What you do want is them to announce that they are going to try this. And that brings confidence again to {the marketplace}, proper? There’s sort of this implied put there. I all the time have the promote the client of final resort that I can promote to.
Paul Daley: (08:03)
So now I haven’t got to be nervous about proudly owning issues. And so we noticed an incredible quantity of buying and selling quantity in 2020, we noticed considerably much less buying and selling quantity in 2021. Once more, as a result of it was tough, corresponding to 2020, but additionally due to the opposite phenomena that I described earlier, which is that the brand new situation calendar was simply very, very sturdy. And so new cash coming into municipals was being absorbed by that new situation calendar. Now that I believe the brand new situation calendar will quiet down, we’ll see sort of a return to regular buying and selling volumes. So my guess is these decreases in commerce counts, these decreases in elements traded within the secondary market, that may reverse itself in 2022.
Chip Barnett: (08:49)
Are you able to discuss a little bit bit concerning the 4 asset lessons that you simply cowl within the completely different dashboards BondWave has?
Paul Daley: (08:56)
Completely. So proper now we’re overlaying all the asset lessons which might be PMP particular. So within the prevailing market value slash markup disclosure rule, that they had sure asset lessons that had been lined, and people had been company bonds, municipal bonds, company bonds and 144A, which is actually only a subset company. So we produce dashboards for all 4 of these asset lessons, however there are different belongings which have trades disseminated that we’ll be rolling out dashboards for as we roll out transaction value evaluation merchandise. So particularly, the structured merchandise, these embrace asset again securities, mortgage backed securities, whether or not these are the, to be introduced, variations of mortgage again securities, or these are the desired swimming pools. So we’ll be producing knowledge for all of these along with the 4 dashboards that we’re presently producing.
Chip Barnett: (09:58)
Do you’ve got any final ideas for our listeners?
Paul Daley: (10:00)
My final ideas are this. I might encourage all people to pursue new applied sciences and new strategies to know buying and selling prices and stuck revenue. I’ve come from the fairness facet of the world myself, the place mounted revenue or the place buying and selling value evaluation is previous, proper? It has been round for many years, it is properly accepted and it is properly understood. Everyone makes use of it from purchase facet to promote facet and even retail traders use it. Coming over to the mounted revenue world the place there’s considerably much less knowledge and fewer transparency, I believe there’s additionally sort of a basic sort of jaded perspective in direction of transaction cross evaluation. The information is not sturdy, the information is tough to take care of, it is tough to attract conclusions from. However there are BondWave and different corporations which might be making advances in how you’re taking that knowledge and interpret it utilizing superior knowledge science strategies to make the information extra consumable. So I might encourage listeners to pursue any variety of new applied sciences and new calculation strategies to assist them higher perceive buying and selling prices and with higher understanding comes higher outcomes. So it is a virtuous cycle in that regard.
Chip Barnett: (11:24)
Paul Daley of BondWave, thanks very a lot for being right here.
Paul Daley: (11:27)
In the present day. Chip. It was my pleasure. Thanks very a lot for having me.
Chip Barnett: (11:31)
Due to Wen-Wyst Jeanmary, who did the audio manufacturing for this episode, and do not forget to charge us, evaluation us and subscribe at www.bonder.com/subscribe. From the Bond Purchaser I am Chip Barnett. And thanks for listening.

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