The boom in portfolio trading, where investors can buy or sell scores of corporate bonds with just a few clicks of a mouse, is fueling mega trades that were rare in credit markets just a few years ago.
Transactions of more than $500 million account for nearly a quarter of US corporate bond portfolio trading activity this year as of October, up from less than 1% in 2018, according to strategists at Barclays Plc. Portfolio transactions comprised about a quarter of all high-grade corporate bond trades between clients and dealers as of last month, the bank’s analysis shows.
Big trades have become more prevalent for a number of reasons. The growth of exchange-traded funds has helped boost portfolio trading in general, while the advancement of technology — including digital trading platforms and improved pricing algorithms — has made it easier to determine prices for large numbers of bonds at once, even if some of the securities don’t trade every day.
And more investors are engaging in black-box trading in credit, where they make investment decisions automatically and can buy big swaths of bonds at once. That allows dealers that might put these trades together to avoid purchasing many, or even any, of the securities themselves.
As portfolio trading volume has grown, it’s become easier to find parties willing to do bigger transactions as well. For investors, the rise of mega deals has simplified the process of making large changes to a portfolio, such as reducing duration or stocking up on bonds with higher credit ratings.
“The depth and the breadth of liquidity in the US corporate bond market has really improved,” according to Barclays’ Zornitsa Todorova. “Portfolio trades add new volume to the market, and as that depth increases, so does the ability of the market to absorb these large volumes.”
Portfolio trading has grown in part because dealers since the global financial crisis have been more reluctant to take on the risk of holding bonds on their balance sheets. When a client is looking to sell bonds, banks want to offload those securities to other money managers as quickly as possible, which the investing style enables.
That’s at least one reason why new portfolio trades are hitting Trace once every seven minutes on average this year, about twice as fast as last year and around 10 times faster than in 2018, according to Barclays’ calculations. A trade topping $500 million is significant in credit markets where average US daily volume in 2023 was a little more than $40 billion.
Also feeding liquidity: electronification. For example, about a third of junk bond trading is electronic now, up from around 2% a decade ago, according to Coalition Greenwich. More trading is shifting to digital platforms like MarketAxess and Tradeweb. Bloomberg LP, the parent company of Bloomberg News, also competes in fixed-income trading services.
To Masaya Okoshi, Wellington’s US investment-grade credit trading team lead, the demand for large-sized trades has always been there. In his view, this year’s mostly calm market has helped pave the way for those jumbo portfolio trades.
“A combination of positive performance in fixed-income and equity markets, generally lower volatility and robust secondary and primary trading volumes in investment grade” has driven the surge, Okoshi said.
The rise of corporate bond ETFs also allows dealers and investors to trade more easily. Dealers making markets in ETFs can buy up big chunks of debt and bundle them into fund shares.
As ETF assets in the US hit the $10 trillion mark for the first time, new fixed income products have been launched at a breakneck speed.
At least 25 credit ETFs debuted in 2024 with one month remaining, more than double all of last year’s new entrants, data compiled by Bloomberg Intelligence’s Athanasios Psarofagis show. The cohort has amassed over $358 billion in assets with an average trading volume of around $150 billion per month.
Instead of tracking down individual bonds or loans with varying risk exposures, traders now can simply choose an ETF and purchase in seconds.
Market Swings
As the velocity and ease of doing large trades increases there’s a potential side effect: more market swings. And liquidity has a way of receding quickly when turmoil hits markets, as in the early days of the pandemic.
“The price for higher liquidity in these asset classes is probably going to be more volatility,” Grant Nachman, founder of Shorecliff Asset Management, said. “Volatility doesn’t necessarily make an asset more or less safe. That’s just somebody’s opinion of the price on a given day.”
Wellington’s Okoshi also sees potential hazards ahead. Portfolio traders may find it difficult to execute large transactions during times of market turbulence, or a crisis like what unfolded during Silicon Valley Bank’s epic meltdown.
“When there’s an idiosyncratic single-name volatility increase, the portfolio-trading channel is not an effective means of distributing risk for that particular credit,” Okoshi said.
But on the upside, investors have been able to find better pricing with the growth of portfolio trades, money managers said. Greater competition provides more liquidity, which allows for more consistent pricing of baskets of trades, Wellington’s Okoshi said. And that in turn allows for a wider variety of portfolio sizes and ultimately more competitive bid-ask transaction costs for investors, he added.
Smaller portfolio trades are already falling out of favor, Barclays data show. Transactions under $50 million made up over half of 2018’s trades while they comprised some 15% in 2024.
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