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Markets: More trading but with fewer dealers
admin | April 12, 2019
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Trading volume in major US fixed income assets has edged up so far this year but with a rising share going to the Top 5 market-makers in each area, according to the latest primary dealer data from the New York Fed. It’s a picture of steady liquidity but in fewer hands.
Average daily trading from the first quarter of 2018 to the first quarter of 2019 rose across Treasury debt, agency MBS and corporate debt (Exhibit 1). Treasury volume rose by 2.54%, agency MBS volume by 8.77% and corporate volume by 9.31%. Clear differences between the sectors continued, however. Average daily trading in Treasuries this year has averaged $605 billion, in MBS $250 billion and in corporates $39 billion.
Exhibit 1: Rising trading volume across major sectors of US fixed income
Source: SIFMA
All markets, perhaps with the exception of Treasury debt, remain concentrated in the hands of the Top 5 primary dealers in each sector (Exhibit 2). The Top 5 by transaction volume captured less than 50% of most parts of the Treasury market in the first quarter except in bills and in notes beyond 10-year maturity, where share in the shortest and longest debt moved above 50%. Top 5 share across sectors of MBS and CMBS, however, ranged from 69% to 89%. Across investment grade corporate debt, Top 5 share ranged from 55% to 80%. In high yield corporate debt, Top 5 share ranged from 71% to nearly 80%. And in asset-backed securities, Top 5 share ranged from 57% to nearly 92%.
Exhibit 2: Transaction share remains largely concentrated in Top 5 dealers
| Top 5 Share of Transactions (%) | |||
| 2018 | 1Q19 | Change | |
| TREASURY | |||
| T-Bills | 52.6 | 53.7 | 1.2 |
| <2Y T | 43.9 | 44.6 | 0.7 |
| 2Y-3Y T | 43.8 | 46.8 | 3.0 |
| 3Y-6Y T | 47.5 | 46.4 | -1.1 |
| 6Y-7Y T | 47.5 | 47.2 | -0.3 |
| 7Y-11Y T | 46.1 | 46.7 | 0.6 |
| 11Y+ T | 56.3 | 58.2 | 1.9 |
| MBS/CMBS | |||
| MBS Cash | 68.3 | 74.0 | 5.8 |
| MBS $Roll | 84.5 | 80.6 | -3.8 |
| CMO | 66.0 | 69.3 | 3.3 |
| Agency CMBS | 79.8 | 89.1 | 9.3 |
| NonAgency RMBS | 79.1 | 78.2 | -1.0 |
| Priv CMBS | 75.1 | 80.7 | 5.7 |
| CORPORATE DEBT | |||
| CP | 80.4 | 80.5 | 0.0 |
| <13M IG | 61.8 | 64.6 | 2.8 |
| <5Y IG | 52.6 | 55.0 | 2.4 |
| <10Y IG | 60.7 | 61.5 | 0.8 |
| 10Y+ IG | 62.3 | 62.5 | 0.2 |
| HIGH YIELD DEBT | |||
| <13M HY | 79.0 | 79.9 | 0.9 |
| <10Y HY | 70.3 | 71.3 | 1.0 |
| 10Y+ HY | 75.3 | 78.1 | 2.8 |
| ABS | |||
| Card ABS | 70.9 | 74.6 | 3.7 |
| SLABS | 89.2 | 91.7 | 2.5 |
| Auto ABS | 75.3 | 76.2 | 0.9 |
| Other ABS | 58.5 | 57.3 | -1.2 |
Source: New York Fed
Despite already concentrated volume, the Top 5 share in the first quarter from 2018 levels across most product categories. The Top 5 share in agency CMBS, for instance, rose by 9.3%. Top 5 share in agency MBS cash transactions rose 5.8%, in private CMBS by 5.7% and in agency CMOs by 3.3%. Top 5 share in most other categories rose by less than 3% with share in a few categories dropping.
Projected net issuance of nearly $1 trillion in Treasury debt for at least the next few years, and expected net growth in MBS and corporate debt should steadily push transaction volume up, although continued concentration of flows would make markets more sensitive to the willingness and ability of a handful of intermediaries to commit capital.
* * *
The view in rates
Rates continue to look rich, especially in the 5- and 10-year part of the Treasury curve. Fair value on both 5- and 10-year notes is somewhere above 2.75%. The market in April has continued to push yields higher. Look for rates to keep rising fastest on 5- than on 10-year notes.
The 2.39% rate on 2-year notes has built in roughly one Fed rate cut in the next two years. That seems to anticipate a Fed willing to defend growth. That seems realistic. The Fed could easily cut if growth shows any sign of slowing below 2.0%.
The view in spreads
Relatively low volatility and heavy net Treasury supply should help spread products tighten. The corporate market still has issues with leverage in investment grade debt and loose underwriting in leveraged loans; a slowing economy should put pressure on those sectors. But corporate management is starting to deleverage. Still, credit concerns linger. Agency MBS should broadly outperform corporate debt.
The view in credit fundamentals
Companies have started to divert cash flow toward paying down debt, have started to sell non-core assets and have curtailed stock buybacks. Management has heard the concerns of debt investors. Households continue to look strong with low unemployment, rising home prices, and generally good performance in investment portfolios.