Fixed income markets are in uncharted territory. Volatility – along with a severe lack of liquidity in fixed income – caused huge challenges in March as the gravity of the Covid-19 pandemic became increasingly acute. Although massive Central Bank interventions averted a more serious crisis in the making, concerns are beginning to mount about some of the longer-term implications these cash injections could have. For instance, with the Federal Reserve inflating its balance sheet with corporate debt across the entire investment grade spectrum, experts warn this could create a number of risks, not least moral hazard. In this climate, fixed income investors need to be vigilant.
Making the most of fixed income data
In order to navigate fixed income markets safely, investors need to have regular access to reliable and accurate data on a timely basis. This is not always an entirely straightforward process given the illiquid nature and overwhelming complexity of certain bond instruments. Moreover, the volume of fixed income data is massive, while it simultaneously may not always be homogeneous, mainly because it is often procured from different sources, making it difficult for institutional investors to reconcile all of the information and measurables. Nonetheless, there have been marked improvements, especially around price transparency in illiquid fixed income instruments following the imposition of regulations such as the EU’s MiFID II (Markets in Financial Instruments Directive II).
The ability to seamlessly obtain data is essential for fixed income investors, especially given the current volatility. That said, the introduction of lockdown measures has created logistical and operational headaches for many financial institutions, as organizations continue to work remotely. Despite the initial disruption, most institutions have been effective in their responses to Covid-19, with limited interruption to business. The fact that so few organizations have been adversely affected – at least from an operations perspective – is down to their adoption of automation and recent technologies, which have helped facilitate the ease in which fixed income data is shared.
Making the most of technology
Had Covid-19 struck 10-15 years ago, the market impact would have been far graver, mainly because many fixed income investors back then relied on antiquated technologies and manual processing when collecting and analyzing datasets. Nowadays, most financial institutions leverage automation tools in their trading, data gathering and operational processes, with a great deal having also introduced IBOR (Investment Book of Record), ABOR (Accounting Book of Record) and PBOR (Performance Book of Record). This has made it easier for firms to collect and aggregate data from multiple sources and compile it into a single version of the truth, enabling for better investment decision-making. By embracing technology, fixed income investors have been able to access more accurate and real-time data, something which has helped insulate them against Covid-19 volatility.
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