MODERNISATION OF THE BOND MARKET

Discover more about how fixed income ETFs are changing the bond market.

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WHAT IS GOING ON IN THE EUROPEAN BOND MARKET?

  • 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.
  • As a new regime of greater macro-led market volatility unfolds, the adoption of fixed income ETFs continues to grow with investors using them for access, liquidity and managing risks in their ‘active’ bond portfolios.
  • We believe ETFs will continue to play an integral part of investors’ toolkit to access and navigate today’s bond markets.

Click here to download the modernisation of the bond market paper.

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

Bond markets have evolved significantly since the global financial crisis of 2008. This is largely due to the shift in banks’ trading models and an increasing reliance on electronic platforms.

The Covid-19 selloff, the market turmoil of 2022 and the 2023 banking crisis acted as key catalysts for the accelerated adoption of ETFs, particularly among institutional investors who helped them navigate rapidly changing market conditions and efficiently access the fixed income market. ETFs were able to provide liquidity, price transparency and immediacy of execution during these uncertain times.

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.

Video 01:04

FIXED INCOME ETF LIQUIDITY: A NEW REGIME

Capital at risk.

The role of fixed Income ETFs in a new market regime

Natacha Blackman – iShares Fixed Income Product Strategist

 

As we brace for a new regime of greater macro-led market volatility, the adoption of fixed income ETFs continues to grow with investors using them for access, liquidity and managing risks in their bond portfolios. The liquidity benefits of fixed income ETFs, particularly during volatile and illiquid markets, have been felt by investors during financial turmoil. ETFs’ trading volumes have surged as underlying bond markets have seen liquidity deteriorate.  ETF trading surged in 2022 despite underlying liquidity challenge chart shown. Even with new bond supply picking up, higher market volatility combined with bouts of illiquidity are likely to be permanent features of this new macro regime, increasing the importance of flexibility in investor portfolios. That’s why at iShares, we believe fixed income ETFs will play an even greater role in the way investors access fixed income markets in the future. Thank you for watching and feel free to navigate our website for more information.

 

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Risk Warnings

 

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. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

 

Important Information

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LIQUIDITY BENEFITS OF FIXED INCOME ETFs

The liquidity benefits of fixed income ETFs are felt by investors, particularly during volatile and illiquid markets. In 2022 and 2023, trading volumes surged to all-time records, as liquidity in the underlying market sharply receded.

As the global ETF market grows, reaching over $2 trillion compared to $1 trillion in 2018,1 it is influencing the overall bond trading ecosystem in Europe. We believe the future scope of these products will see a more diversified investor base and further utilisation of fixed income ETFs as long and short instruments. Developments such as larger lending pools of ETF units and listed, centrally cleared options on ETFs have further enhanced the liquidity in European domiciled ETFs.

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.

1 Source: BlackRock and Bloomberg, as of October 31, 2023.