Working from home: effect on markets

It’s hard to believe we’re almost one year into a global transition from operating in offices to working from home. While many talk about the challenges and benefits associated with one really long work day, the effects on markets are more far reaching than just homeschooling and other challenges we talk about in our personal lives.

In fixed income, there’s evidence the pandemic has accelerated the trend toward electronic trading. Without access to their in-office arsenal, many traders have become more reliant on desktops, laptops, or mobile devices and being able to glance across an array of pricing data and inputs on a single screen to execute transactions. The average daily e-trading volume in January 2021 was $10.6 billion, according to Greenwich Associates estimates, surpassing the prior record of $10.3 billion last May, indicating that the effects of this electronification are likely here to stay- and not just driven by hyper volatility.

Interestingly, the market is beginning to diversify its use of trading tools, though disclosed RFQ still comprises nearly half of electronic volume. At ICE, we saw record volumes for fixed income portfolio trading in the fourth quarter of 2020. Portfolio trading now comprises ~5% of total bond market trading volumes, nearly three times the amount in prior years according to FINRA TRACE estimates.

Alongside this shift, there has been a rise in demand for data and analytics. We’ve seen healthy growth in pricing and reference data use, as new customers adopt feeds for flexibility with data delivery. As developments in artificial intelligence and algorithmic trading help traders work to identify trends faster, there’s been a shift in focus: from pure market analysis toward constructing a best execution or liquidity strategy, and using more targeted information for clients.

Work-from-home environments could have more direct impacts for some bondholders. Even after the pandemic, a higher rate of remote work - and resulting fall in the demand for office space - could mean investors need to begin pricing in the likelihood that lower rated bonds in some commercial mortgage deals could take losses. This appears to have kept Private Label CMBS yields for lower rated bonds at higher levels than they were pre-COVID, while most other comparable asset classes have managed to improve relative to early 2020.

Meanwhile, U.S. inflation jitters have seen investors get gun shy about holding long term bonds at such low rates and in Europe, debt at negative yields is being shunned. Still, even as global bond markets see their worst start to the year since 2015, there is good news for the broader economy as vaccine rollouts continue, and fiscal and monetary stimulus measures remain accommodative.

Stay well,

Lynn