Bundling Corporate Bonds is Changing the Fixed Income Market

The fixed income market certainly got a robust injection of capital via the central bank purchases in conjunction with investors looking for safe havens amid the pandemic. A byproduct of the heightened activity in the bond market is innovation in the way bonds are bundled and sold—in this case, it’s portfolio trading.

“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,” a Reuters article noted. “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.”

This new innovation grew into prominence thanks to the pandemic.

“More significantly, the strategy may have earned its stripes during the coronavirus-linked market mayhem,” the article added. “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 firms, packaged into bond portfolios, smoothly changed hands.”

The fixed income market is taking to portfolio trading nicely with heavy volume.

“Cumulative portfolio trading volumes globally on bond trading platform Tradeweb topped $100 billion in June, rising from just over $2 billion when it launched portfolio trading for U.S. investment grade and high yield bonds in January 2019,” the article said. “The cumulative total was almost $51 billion in January 2020. It executed 54 portfolio trades in Europe in March, versus 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.


^SPASXCOB data by YCharts

An Additional Corporate Bond Alternative

Another ETF to consider is the Goldman Sachs Access Investment Grade Corporate Bond ETF (GIGB). GIGB seeks to provide investment results that closely correspond to the performance of the FTSE Goldman Sachs Investment Grade Corporate Bond Index.

The fund seeks to achieve its investment objective by investing at least 80% of its assets (exclusive of collateral held from securities lending) in securities included in its underlying index. The index is a rules-based index that is designed to measure the performance of investment grade, corporate bonds denominated in U.S. dollars that meet certain liquidity and fundamental screening criteria.

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