GREENWICH, Conn. — U.S. institutional investors, led by plan sponsors, ramped up their fixed-income trading sharply in the year ended April 30 as they sought to boost returns amid historically low interest rates, according to a report from Greenwich Associates.
U.S. fixed-income trading, excluding short-term notes and derivatives, rose nearly 20% to $7.5 trillion over the period among investors participating in the Greenwich study.
"For pension plan sponsors, low interest rates increase obligations while also making it much harder to meet targets," said Woody Canaday, a Greenwich consultant, in the report. "While rates on the benchmark 10-year government bond were below 4% for most of 2003, our research shows that plan sponsors were looking for a fixed-income rate of return of 5.4% for 2004."
Trading volume increased — in some cases significantly — in nearly every fixed-income category except distressed debt, where trading volume fell 30%. According to the report, the biggest jump in trading was in asset-backed securities, where volume rose 65%. That was followed by agency securities and collateralized debt obligations, up 32% and 29%, respectively.
The fixed-income increase was helped by a pickup in electronic trading, which rose by more than 25% in the same period, according to Greenwich. Nearly every category of institution reported small increases of trading online except investment-grade credit investors. The biggest jump was among corporate bond investors. Forty-one percent of investment-grade investors reported trading online, up from 31% in the year-ago period.
Greenwich consultant Tim Sangston said in the report that much of the increase in electronic bond trading can be linked to new trading systems, particularly MarketAxess Holdings Inc., New York, which, he said, "has established itself as a viable trading platform for corporate bonds."
Still, he said many institutions are hesitant to trade corporate bonds electronically because of fear they will lose the insights that sales representatives provide.
"Among institutions trading investment-grade credit bonds, more than 45% say they are discouraged from trading online by the possible negative impact on their relationships with their sales reps, or the potential for losing valuable market color," Mr. Sangston said.
Not surprisingly, then, institutional investors are increasingly looking to their dealers for as specialist sales representatives rather than generalists, which, according to the report, is part of the drive to seek out fixed-income products that can bring them extra return. For example, more than 40% of the respondents reported a preference for specialist reps for short-term fixed-income products last year, compared with about 25% in prior years. In the emerging markets category, 80% preferred specialist coverage in 2004, up from the 72% that already preferred specialists.
"In the current low-rate environment, investors are branching out into new sectors and into slightly riskier securities in the sectors they've used before," Mr. Canaday said in the report. "So, rather than just getting quotes and canned opinions from a generalist salesperson, they want information and ideas from specialists who are immersed in the unfamiliar areas."
Institutional investors also are bolstering their in-house ranks, according to the report. More than 40% of the respondents said they planned to hire fixed-income research staff within the next 12 months. At institutions trading more than $10 billion in fixed income annually, that proportion rises to 46%, according to the report.
The most aggressive fixed-income hiring is expected at hedge funds, where 52% plan to add fixed-income staff.