Wednesday, May 3, 2017 Stamford, CT USA — Investor demand for credit exposure is outstripping supply. Excess demand is in turn fueling rapid innovation in credit-market products.
That’s the primary conclusion of a new report, Credit Investing Beyond the Bond Market, from Greenwich Associates. The report finds that many institutional investors lack sufficient access to credit markets and the exposures they need.
“Access is not a significant problem for the largest investors, who are able to find the bonds and trade cleared and uncleared swaps,” says Kevin McPartland, Head of Research in Greenwich Associates Market Structure and Technology Practice, and author of the report. “However, given the reduced liquidity of corporate bonds and the inability of many smaller investors to trade swaps, the ability to execute credit-related strategies remains constrained.”
These access issues are driving product innovation in credit default swaps, ETFs and futures. The Greenwich Associates report provides a deep analysis of each product, their current usage, pros, cons and likely path forward:
- The Index Credit Default Swaps market is highly liquid and efficient. Nearly 90% of trading in investment-grade index CDS is now done electronically, according to Greenwich Associates research, up from just one-quarter in 2013.
- Total Return Swaps allow investors to swap a fixed payment with a counterparty in return for exposure to a particular basket of credit, thus gaining exposure to those credits without actually owning the bonds.
- Bond ETFs are booming, with AUM in several of the top fixed-income ETFs approaching $30 billion.
- Credit Index Futures tied to the most widely used credit indices are gaining traction with the most demand coming from investors who are not trading and do not wish to trade swaps.