The culprits include, but are not limited to: leverage ratios, liquidity regulation, derivatives clearing, low yields, high asset correlations, a booming primary market, the proverbial hunt for yield, and ham-fisted execution.
But none of these are going away (except maybe ham-fisted execution), and in some respects the regulatory onslaught has made for a healthier fixed income market. Fewer players are trying to make markets in everything and smaller inventories mean a smaller inter-dealer market, but more emphasis on client demand. Tougher capital regulations have forced banks to look at risk-adjusted return on capital, not just revenues.
Fixed income trading brings in far less revenue these days, but what it does bring in is a reflection of real axes and purposeful expression of investment theses, not leverage plus carry.
That’s not to say today’s trading environment is sorted; far from it. It is fragile and overreacts to minor hiccups.
But the right approach is to look for solutions, not dwell on problems. Any of the thirty-plus tech platforms might wring extra liquidity out of the system, and standardising on a platform which can connect not only live orders, but possible interest, should be a matter of urgency for everyone who deals bonds.
The ICMA survey, despite the death of liquidity headlines, is actually a welcome demonstration that much of the market is on board for the new phase of fixed income trading. Denial is behind us. Bargaining, then acceptance is ahead.