How to unlock bond market potential

Navigating the complexities of bond markets can be daunting, especially when it comes to identifying opportunities that offer optimal value. Where market inefficiencies can present both risks and rewards, having access to precise insights is crucial for investors.

Advanced analytics in fixed income investing

Leveraging advanced data analytics and a deep understanding of market dynamics, institutions are now better equipped to uncover hidden pricing mismatches and relative valuations, providing asset managers and bond issuers with the clarity they need to make informed decisions.

At the forefront of this shift is the application of innovative strategies designed to simplify these challenges and offer a competitive edge in fixed income investing. CommBank is using a bespoke system to bring the insights to Australian and New Zealand fixed income markets.

Simplifying decision-making

The bank’s Quant, Data, Analytics and Technology (QDAT) team has developed the Bond Relative Value Suite tool, which provides tailored investment insights, specifically designed to give clients a competitive edge. It helps asset managers and bond issuers to capitalise on market inefficiencies and optimise their investment and funding strategies.                            

“From a client perspective, it’s about showing and identifying for them which bonds to invest in and which bonds not to invest in — and if they’re index players, for example, maybe switching out of certain securities and moving into other securities, be it tenor or be it different names,” says Matthew Zibert, Executive Director and Head of High Grade and Rate Sales at CommBank.

“That’s quite a simplistic way to look at it, but ideally that’s what we want. We want to create these relative value opportunities via difficult quantitative methods and make them as simple to understand as we can.”

“From a client perspective, it’s about showing and identifying for them which bonds to invest in and which bonds not to invest in.” – Matthew Zibert, Executive Director and Head of High Grade and Rate Sales, CommBank

Trade opportunities

CommBank’s bond sales team is using the tool to analyse the bond market and identify trades that are advantageous for individual clients.

“It’s around which bonds look expensive or cheap on a relative value basis, and which combination of bonds, as well,” says Andrea Schmidt, CommBank’s head of Systematic Markets. “So, I can ask, ‘I want to combine one bond long and the other one short — what is a good combination that makes sense?’”

A customised lens

The tool is also used to analyse CommBank traders’ own positions and identify which of those would be attractive to clients given recent activity.

“It’s about facilitating risk transfer that provides an opportunity for both CommBank to clear risk and for clients to pick up good risk, that is, the bonds that look cheap versus the ones that look rich, and vice versa” says Zibert.

We want to create these relative value opportunities via difficult quantitative methods and make them as simple to understand as we can.” – Matthew Zibert, Executive Director and Head of High Grade and Rate Sales, CommBank

For example, recently CommBank’s traders were long a semi government bond maturing in 2034 and neutral to slightly short on the bond by the same issuer maturing in 2032. The traders used the Bond RV Suite to see how the issuer curve compared with other semi government issuers, and how the curve looked when the bonds were viewed as an asset swap spread.

“For us, even though we like the trade, we are constrained by our risk limits,” says Zibert.” “We’d look to reduce that trade by highlighting the opportunity to a client. In this case, it was a large domestic real money account and they did the trade with us within several minutes of us highlighting it to them.”

Data-driven insights

As a top-five player in the Australian bond market, CommBank has access to large amounts of data about bond flows, which it can also surface to clients, answering questions like, “Are we seeing more buying in the shorter-end of the curve — the 24s, 25s and 26s — or are we seeing more buying in the 2034s?”

The data creates a discussion point for clients about why there are flows in one part of the curve and whether this makes sense given the pricing relativities that the Bond RV Suite has uncovered.

Supporting issuers with strategic acumen

Schmidt says the Bond RV Suite is also helpful for issuers, who are using the tool’s analytic capabilities to determine a good point on the curve for issuance to achieve the best funding relative to demand.

Users of the tool can search for information on specific names or tenures, and also screen their searches for only mean reverting assets, compared with bonds that appear to have inefficient pricing, but aren’t necessarily mean reverting.

CommBank began developing the application about three and a half years ago, when it wanted to make better use of the large amount of real-time and end-of-day bond market data it had, and the competitive advantage it had in fixed income.

“We called it a hackathon,” says Schmidt. “We had a week with a couple of developers in my team, quants, salespeople and traders. We started with a whiteboard, wrote what we were going to do, and by the end of the week, we had something that looked pretty good and started adding more features from there.”

The Bond RV Suite currently focuses on Australian and New Zealand government/semi-government/supranational bonds, but there are plans to expand its use to corporate bonds and interest-rate derivatives.

To learn more about CommBank’s Bond Relative Value Suite tool, contact us via email.