June 21, 2022 | Stamford, CT — The sell-off in fixed income is revealing some concerning weaknesses in the U.S. corporate bond market, including a lack of liquidity, a dearth of reliable data and inefficiencies in market structure that complicate life for traders. 

U.S. corporate bonds have realized the biggest dollar decline since records began more than 20 years ago. The downturn is putting pressure on a still-evolving market structure and creating some significant issues for investors. These challenges could be the catalyst for the adoption of new technologies that facilitate true positive change for the buy side.

The immediate difficulty investors face is a shortage of liquidity. With concerns about balance-sheet risk on the rise, banks have been pulling away from the most illiquid markets and even some of the more-liquid ones, depending on their appetite for intermediate risk transfer on behalf of their clients. The consequences have left investors frustrated.  

“In simplest terms, the buy side is asking everyone to just stop playing games,” says Audrey Blater, Senior Analyst for Coalition Greenwich Market Structure & Technology and author of Challenging Credit Markets Are a Call to Action for Traders. “In a market that lacks transparency and keeps participants in the dark about pricing, traders say there are still many games being played for price discovery’s sake, and that axe quality needs to improve alongside price efficiency.”

Scarce liquidity is not the only obstacle facing investors. In the relatively opaque corporate bond market, investors also describe an inverse relationship between volatility and the reliability of data. Many investors simply lack confidence in data required for pre-trade and post-trade analytics. Investors also complain about workflow inefficiencies that make it difficult to navigate volatile market conditions. 

Although these issues are causing real headaches for traders today, over the long term, many investors believe these challenges could represent a catalyst for real change after a long period of inertia. 

Investors are confident that fixed-income data is becoming more useful and reliable over time, as increasing numbers of investors are taking advantage of new technology systems that enhance the trading process. More generally, with dealers less able or less willing to make prices, investors must think outside the box for pricing and liquidity. 

“The search for liquidity has long been tethered to single banks and platforms,” says Audrey Blater. “In today’s markets, paradigms are shifting as the buy side looks to a full spectrum of resources to transfer risk.”