Several buy-side fixed income traders have confirmed that electronic prices are currently around 10% off the price that bonds are actually trading at, creating problems for price formation and execution analysis.
“Liquidity in fixed income is massively worse [than equities],” noted one trader. “We’re used to prices on screen being imperfect, but they are regularly between 5-10% off where they are trading in credit.”
Another observed, “Even in liquid rates it still not accurate.”
Bond funds are seeing a major sell-off, having seen positive inflows in 2020 up until the 26 February and then outflows totalling US$145 billion to the 18 March, according to data from EFPR, which tracks over 123,500 traditional and alternative funds domiciled globally with more than US$34 trillion in total assets.
Year-to-date, EFPR has found that bond funds have posted a collective loss of under 5% compared to the over 20% decline recorded by all equity funds.
This is triggering buy-side firms to sell assets in order to provide redemptions for clients. While electronic trading platforms are reporting strong trading volumes, finding the right price at which to trade is very hard and the lack of firm prices in the markets underlines the problem that market makers have in volatile and irregularly trade markets like fixed income. The absence of clear pricing also impacts post-trade analysis.
The European Commission is currently consulting on the development of a consolidated tape of fixed income prices, as part of a review of its Markets in Financial Instruments Directive (MiFID II).
©The DESK 2020
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