It looks set to be an exciting year in corporate bond trading. Global bonds are off to a record start, with debt sales by governments and companies surpassing half a trillion dollars, signalling that confidence is returning to markets.

After a tumultuous year in 2022 – from the geopolitical events impacting markets, to “Trussonomics” kick-starting a dislocation in the UK markets – traders had to navigate significant volatility. But rate rising tactics, led by the US Federation and central banks, increased market confidence that inflation was finally getting under control.

Navigating the new normal

Volatile times are here to stay, however, and the market will have to grapple with this new normal. And whilst some volatility can be a positive thing, too much isn’t good for investor returns.

There are positive indicators for 2023, with reports of a significant resurgence in bonds, but traders still need to operate against the backdrop of lower returns, reduced balance sheets and less liquidity. It’s a challenging market, but one where the increasing use of technology and AI combined (both in-house and externally provided) is helping traders to align and seek out new opportunities. This is supporting traders in riding out the volatility storm, uncovering liquidity amidst challenging market conditions.

As processes become smoother, technology safer, predictions more accurate and pre-trade information leakages minimised, traders are putting greater trust in tools, such as smart protocols. Not only does it help them to access latent pools of liquidity, but it also speeds-up settlement cycles and secures best price (as only suitable matches are presented, as opposed taking trades to a wider untargeted market). As greater trust is being placed in technology, it’s proving simpler to demonstrate best execution – resulting in traders becoming more comfortable that they’re not being disintermediated.

Global ramifications

There is still plenty of movement in the markets globally, which technology is helping traders to navigate, presenting multiple opportunities and threats. Starting in the US, the market is in a relatively calm situation – with inflation under control and only a minor recession (if at all) predicted.

The UK also followed the US lead, in raising rates, which is having a positive impact on the market. Recession fears still remain, as the UK relies on imports more heavily than the US (skewing recovery), but it’s hoped that the downturn won’t be as deep as initially predicted. Current leadership, both in the Bank of England and Government, has also been positively received by markets – being widely considered as a more stable pair of hands.

The EU is still grappling with rate rises against variances in multiple economies, however. Germany scrambled to find alternative sources to Russian energy last year, which is now under control. But the unrest around pension issues in France, and debt concerns in Italy, create a multitude of variables in the trading block.

For every half a percent that the ECB raises rates, for example, it has a significant dampening effect on Italy – Europe’s third largest economy. If the turmoil in Italy continues, it’s likely to result in a negative fallout for Greece and Spain too.

Outside of the EU and US, Japan is one to watch. With the largest debt of any country, 216% of GDP, and the recent moving of its target rate for 10 year JGB (Japan Government Bond yield) – the ramifications could be felt globally. This could potentially include selling off a significant amount of international bond holdings, which will be repatriated back into yen.

Trust and transparency

Whilst we can predict what is likely to happen this year, based on market indicators, as with any trading year there will always be an unexpected curveball thrown into the mix. But something that will remain regardless is the increased emphasis on improving trust and transparency in trading.

By utilising tools that create greater transparency, but within secure spaces, execution can be much more effective – from improving settlement cycles to securing best price. Whilst there are positive signs on the horizon overall for markets this year, volatility will remain. And by operating in environments that facilitate greater trust, shared visions of desired target states can be realised.