US Fixed Income Market: State of the Industry 2012

Executive Summary       
The fixed income universe is shifting rapidly. Participants adapt to the low interest rate environment of quantitative easing. Banks re-think business models as renewed capital regulation takes hold. Dealers must adapt the inventory model to provide services without proprietary trading. These colliding orbits will transform the corporate bond market.

And make no mistake. We are living in a credit bubble. Asset allocation trends post 2008, where investors seek safety of principal via fixed income often finds its place in the US markets. US bonds funds have seen more than $150 billion in inflows in 2012 alone. Issuance has boomed. And yet, primary dealer inventory continues to decline. Data shows that customer-to-customer trades are rising but this space has a limit. 

New liquidity pools are emerging. Electronic volumes are now 22 percent of the cash market. Asset managers and exchange traded fund (ETF) market makers find their odd-lot trade destination in alternative trading systems. The line between institutional and retail blurs as comingled flows make for attractive pools of liquidity for many participants. Electronic is no longer a voice equivalent on the screen. Innovative protocols and new order flow networks have a place in the new fixed income universe. Many asset managers and exchange traded fund (ETF) market makers find it more efficient to execute odd-lot sized trades across Alternative Trading Systems (ATSs).

A bond revolution is underway. Many believe an exchange like environment will emerge for active bonds. Regulators expect same degree of price discovery, competition and efficiency for credit as exists in the equities market. New players may fill the role of liquidity provisioning, such as high-speed proprietary trading groups and hedge funds. A unique market structure will emerge. Both auction-based and order-driven protocols have a place in this new universe. Opportunity abounds and the future is bright.