THE MODERNISATION OF THE EUROPEAN BOND MARKET

The European bond market is modernising at a rapid pace, with the rise of “electronification”, algorithmic pricing capabilities and new trading technologies. Fixed income ETFs are continuing to work as an enabling technology, playing an increasingly integral role in portfolio construction

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SUMMARY

SUMMARY

  • Growing adoption of fixed income ETFs and other index- and portfolio-based products, coupled with dramatic improvements in technology, are continuing to revolutionise the way investors access European corporate bond markets.
  • We believe ETFs will continue to play an integral role for investors looking to access and navigate today’s bond markets.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

CHANGE IS IN THE AIR FOR BOND MARKETS

CHANGE IS IN THE AIR FOR BOND MARKETS

Bond markets have evolved significantly since the global financial crisis of 2008, largely due to the shift in banks’s trading models and the reliance on electronic platforms. Against this backdrop, the use of fixed income index instruments, including ETFs, has significantly increased due to the benefits they bring, including improved transparency, liquidity and efficiency. 

Source: BlackRock. Data as at September 2021.

During the COVID-19 induced market volatility of the first half of 2020, trading volumes and ultimately assets in fixed income ETFs soared to all-time records as liquidity in the underlying market sharply receded.  As fixed income ETF assets (now topping $1.7 trillion globally) continue to grow, the overall trading ecosystem supporting them has also developed briskly. Find out more about this evolution in our 2020 Modernisation of the Bond Market paper.

In recent years, adoption of fixed income ETFs has continued to advance, particularly by institutional investors, driven by the continued increase in the liquidity of ETFs and broader enhancements in the fixed income trading ecosystem.

The result is that investors are now incorporating ETFs alongside bonds and derivatives as part of their broader toolkit.

Risk: Two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to repay the principal and make interest payments.

CHALLENGES IN FIXED INCOME ARE PROMPTING CHANGE

CHALLENGES IN FIXED INCOME ARE PROMPTING CHANGE

With the traditional role of fixed income in portfolios being challenged, investors are embracing a broader toolkit of index- and portfolio-based products to generate additional sources of return and gain cost efficiencies.

Alongside this, the development of the ETF borrow and repo markets are helping a select group of fixed income ETFs to be considered as both long and short instruments. Advancements in electronification and automation are reducing transaction costs and supporting these trends.

Finally, the acceleration of environmental, social and governance (ESG) investing and integration is providing a further boost to adoption for all investor types.

3 KEY ETF ECOSYSTEM DEVELOPMENTS ARE DRIVING THE ONGOING MODERNISATION

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1. Evolution of ETF trading & analytics

The growing adoption of ETFs has been supported by an increase in the availability and transparency of data on trading volumes, as well as the electronification of ETF trading which has led to further automation, ease of access for investors and lower execution costs.

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2. Development of the ETF ecosystem: Unit lending, repo and options

As the ETF market continues to evolve with a more diversified base of investors, developments such as larger lending pools of ETF units and listed, centrally-cleared options on ETFs are further enhancing the liquidity in European domiciled ETFs.

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3. Advances in ETF primary market processes

As fixed income ETFs continue to increase in size and scale, a robust, durable primary process and resilient infrastructure is further enhancing the health of the ETF ecosystem.

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‘THE MODERNISATION OF THE EUROPEAN BOND MARKET: THE JOURNEY CONTINUES’

Discover the 3 key trends we believe are driving the integral role of fixed income ETFs for investors looking to access and navigate bond markets.