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Three megatrends shaping the fixed income investing landscape

Debbie Lawrence
Debbie Lawrence
Group Head of Data Management and Strategy at LSEG
Emily Prince
Emily Prince
CEO, Yield Book and Global Head of Analytics Product Management at LSEG
Jon George
Jon George
Global Head FICC Trading Solutions at LSEG

The global fixed income market grew significantly in 2020. Debt issuance reached $27.3trn and the global bond markets’ outstanding value reached $123trn. What are the main megatrends driving this expansion and what are the prospects for fixed income in the coming years?

  1. Despite the rapid expansion of the fixed income market, the segment has been heavily impacted by waves of change, including the rise of developing market economies.
  2. In our new special report with WIRED, the leading technology publication, we examine the three megatrends that are shaping the fixed income investing landscape.
  3. To understand the future of fixed income, as well as the challenges and opportunities for investors, we need to assess the impact of emerging markets, sustainable finance and proliferation of passive investing instruments on this complex asset class.

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The quest for yield from emerging financial markets

As bond yields in the major economies have flatlined, further driven by the quantitative easing policies implemented by central banks globally to mitigate the economic effects of COVID-19, investors are increasingly seeking out higher returns in emerging markets (EM).

Once seen as risky and volatile, emerging market bonds have in the past decade become a more mature and fast-growing segment of the global financial market.

At Refinitiv, we are meeting the growing demand in EM with greater depth of coverage of both local currency and broader issuance markets.

Refinitiv offers industry-leading coverage for emerging markets OTC data, with over 1.2 million fixed income instruments in the EM space alone, sourced from over a thousand third-party contributors.

We continue to expand our coverage in key geographies, including China, India and Latin America. This includes adding new exchanges and new content sets sourced from key partners.

Watch – Fixed income: Evolving investor trends

Download Fixed income: Evolving investor trends – An LSEG report in partnership with WIRED that explores the macro trends impacting investor behaviour and preferences for fixed income

“The sleeping giants have woken up” with sustainable finance

Sustainability is the new business reality. And as the allocator of capital, financial firms are playing a pivotal role in steering the transition towards a low-carbon economy and in driving socially positive outcomes.

Environmental, social and governance (ESG) considerations are widely accepted by institutional finance as critical to managing risk and improving investment outcomes. AUM allocated toward sustainable investing exceeded $30 trillion in 2018, and participation from retail investors is at ~25 percent and expected to grow quickly in coming years.

In addition, regulators in several jurisdictions have developed taxonomies aligned with climate or broader sustainability objectives.

Many see the EU Sustainable Taxonomy as best practice, serving as an important ‘first-mover’ framework that will inform similar initiatives in developing markets. As a result, investment managers will have to assess and report risk to their portfolios related to climate change, in alignment with the EU and other taxonomies.

To meet this market demand, we have invested to improve our representation of sustainable fixed income instruments, which are at the forefront of financing the transition of the global economy to carbon neutrality.

David Harris quote about sustainability and climate in fixed income investing

The fixed income market has a vital part to play in the unfolding global shift in investor behaviour.

We are witnessing a host of changes – from the introduction of new types of bonds, to new industry guidelines and updated regulatory oversight – all of which lead to increased demand for relevant reference data.

We are consequently working to deliver the data our customers expect in line with this global trend.

The shift to passive

COVID-19-driven market volatility has pushed investors to seek out greater price transparency and lower transaction costs. This led to a boom in fixed income exchange traded funds (ETFs), which were on the cusp of outperforming traditional index-tracking mutual funds for the first time in 2020.

ETFs also enable investors to tap into a marketplace that has been traditionally fragmented and difficult to access. In fact, according to a BlackRock report, global fixed income ETF assets accounted for $1.3trn at the end of June 2020, representing a 30 percent YoY growth.

2021 – the year of fixed income

This year has been a monumental year for Refinitiv, particularly as it pertains to fixed income.

With the integration of Refinitiv into the London Stock Exchange Group, we can offer our customers – from asset management firms and pension funds to investment banks and sell-side trading desks – holistic fixed income data, services, and capabilities.

This includes both FTSE Russell Indices, and Yield Book, a leading analytics platform with 30 years of experience providing risk analytics for fixed income.

All of this means our customers can rely on consistent pricing and reference data inputs, supported by market-leading analytical capabilities, to build benchmark and custom index strategies, support multi-asset and portfolio valuation, and meet regulatory reporting and risk workflows requirements.

And in this rapidly evolving and multifaceted market, with an often bewildering range of solutions available to choose from, having a single authoritative provider of fixed income data, services and capabilities has never been more crucial.

Which three megatrends shaping the fixed income investing landscape