Investment Operations

RISING INTEREST RATES COULD ACCELERATE DIGITIZATION OF CORPORATE BOND ISSUANCE

Securities Lending and borrowing

A slowdown in corporate bond new issuance could provide an opportunity for market participants to make progress towards digitizing the corporate bond new issuance process, according to research firm Coalition Greenwich.

Following a blockbuster year in 2021 and a stronger than expected Q1 2022, U.S. corporate bond issuance has slowed, due mainly to rising interest rates. This slowdown is bad news for debt capital markets revenues, which Coalition Greenwich estimates are down 24% from Q1 2021 to Q1 2022 among the top 12 banks. 

“The lull in action is giving the market’s largest participants a chance to drive forward with much needed technological and process improvements for the corporate bond new issuance process,” says Kevin McPartland, Head of Research at Coalition Greenwich Market Structure & Technology and author of The Digitization of Corporate Bond New Issuance.

Emerging from the Dark Ages
Over the past decade, according to the report, technology investments in the institutional corporate bond market were largely focused on trading in the secondary market. A laundry list of innovations including evaluated pricing, all-to-all trading, portfolio trading, and bond ETFs helped to drive roughly 40% of bond trading onto the screen and away from the decades-old world of phone and chat. 

Although the primary market has attracted much less attention, market participants have rolled out technologies aimed at streamlining the new issue process. In fact, 41% of institutional investors participating in a Q1 2022 Coalition Greenwich study believe that technology has added efficiency to the new issuance process over the past 12 months. Over the past two years, established players like Bloomberg’s New Issue Monitor (NIM) and relatively new entrants like DirectBooks have used digital technology to streamline workflows and communication between market participants.

“The new issuance process and the technology to support it is finally emerging from the dark ages,” McPartland said. “While dealers are often nervous about technology disrupting their client relationships—and profit margins—solutions now in the works improve workflows and distribution to a point that nearly everyone benefits.”

The current market slowdown could provide additional breathing room to replace the unstructured process of chats, emails and spreadsheets that still dominate the primary market with digital platforms that allow the buy side to express interest in, and send instructions about, new issues.

“Over the long term, fully digitizing bonds from the point of issuance via a centrally controlled but decentralized technology could overtime create a corporate bond market that is more accessible to issuers, traders and long-term investors alike,” concluded McPartland