Quant is Wiring up Bond Market

The work-from-home era is fueling a surge in electronic bond trading with the quant revolution that is likely to sweep the debt world.

Long credit positions held by quants have doubled since 2018 according to Man Group data, outpacing the 20% growth for other asset managers as systematic players seize on the rapid market modernization — like they did in stocks years ago.

Electronic venues like MarketAxess and TradeWeb accounted for 37% of investment-grade and 26% of high-yield trading in May, 8 percentage points higher than the year before, Coalition Greenwich data show.

Liquidity in the bond market has long been fragmented by its very nature — companies generally issue multiple bonds. That means quants might see their models spit out a dream portfolio but have to adjust it based on what can actually be traded

“We had to try to do things that were less natural in quant strategies,” such as trading in larger sizes or catering to dealer inventories, Paul Kamenski, co-head of credit at the quant firm Man Numeric said. “It’s still hard today, but it’s become more manageable.”

That doesn’t necessarily mean the whole market is suddenly highly liquid — gripes about how hard it is to offload large blocks are everywhere.

But it’s become easier to move smaller sizes and figure out where each bond is trading, which helps detect signals and cut transaction costs, Horowitz said.

Bond quants remain a tiny minority — those long positions total around $23 billion, Man Group says, versus $537 billion for other managers. And the systematic bunch operates a range of strategies, from equity-style factors like value or momentum to arbitrage or trades based on moves in an issuer’s stock.

That all makes performance hard to judge and data is scarce. A Premialab index of systematic credit strategies built by investment banks lost 5% over the past three years of rising markets and gained nearly 3% in 2021. Among global bond mutual funds, quants trailed other investors on a three-year horizon, eVestment data show.

Reference:

Bloomberg, 2021-07-11, “Wall Street’s Math Whizzes Are Racing to Wire Up the Bond Market”