By Jonathan Rick, Director of Research, Tradeweb
In our ongoing look at debt issuance and its effect on secondary market dynamics, we focus this month on U.S. corporate credit and how record issuance is opening opportunities for sophisticated traders to create liquidity in less-liquid bonds by using the portfolio trading protocol.
In portfolio trading, multiple bonds are bundled into a single all-or-nothing price to achieve a more diverse trade profile and efficient execution. Illiquid bonds can be paired with more active new issues to piggy-back on the liquidity and achieve higher hit rates and better pricing.
With the ebb and flow of this past year’s record pace of issuance, we’ve seen a correlation between total market portfolio trading activity as a percentage of TRACE and the previous month’s new issue volume. This generally makes sense as investors, particularly passive ones, are using the mechanism to rebalance their positions and add these new issues. But in general, portfolio trading’s share of TRACE trades is growing. We’ve seen a similar trend on the Tradeweb platform.
The surge in new issuance is creating more opportunities for portfolio trades. Buoyed by tight spreads and historically low Treasuries rates, corporates in the March-to-June period of last year more than doubled their pace of issuance from the same period in 2019. April’s issuance shattered the same month’s volume in 2019 by more than three times. Issuance continued at a brisk pace into year end and we’re now seeing greater adoption of portfolio trading, especially among new issues.