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Emerging Technologies Set to Change the Fixed-Income Market

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This article was originally published on ETFTrends.com.

As the stock market continues to make record highs, the infusion of robotics and artificial intelligence in the bond market is giving the fixed-income space its own renaissance as more emerging technologies are changing the landscape of the industry.

A recent Forbes article highlighted the bout of changes happening in the fixed-income arena, such as more reliance on machine learning, automation and algorithms. Adopting this technology can allow for better liquidity and enhanced speed when it comes to identifying trends within the bond market.

"After having experienced both the sell-side and the buy-side as a bond trader, it was clear to me that asset managers needed a more resilient market structure with more independent avenues to access liquidity, especially with reduced capital commitment and risk-taking by traditional intermediaries," explains Constantinos Antoniades, the Head of Fixed-Income at Liquidnet. "Equally important, asset managers until relatively recently had no tools to access liquidity directly from their peers for a better implementation of their investment strategies."

Related: Embracing Disruption with the Disruptive ETF Virtual Summit

Other breakthroughs with the incorporation of these emerging technologies include the ability to forecast the performance of a set of bonds via indexing. Machine learning technology can extrapolate news data and determine whether a story is positive or negative, giving bond traders market research to make trading decisions.

""The corporate bond market has evolved dramatically over the last few years, with electronic trading playing a much bigger role in liquidity and price formation," said Antoniades. "Nevertheless, what we have seen so far is just the beginning."

Senior Loan ETF Rises

The Invesco Senior Loan ETF (BKLN) was up 0.34% as the ETF continues its solid performance for the year with a 2.71% return YTD and 3.51% within the past 12 months. BKLN is based on the S&P/LSTA U.S. Leveraged Loan 100 Index, which tracks the market-weighted performance of the largest institutional leveraged loans according to market weightings, spreads and interest payments.

Senior loans are typically used for business recapitalizations, acquisitions, leveraged buyouts, and re-financings. BKLN’s loan portfolio includes the purchase of loans from banks or other financial institutions through assignments or participations.

Additionally, BKLN may acquire a direct interest in a senior loan from the agent or another lender via an assignment or an indirect interest in the loan by participating in another lender’s portion of a loan. BKLN sells the loans within the portfolio through an assignment, but it may also sell participation interests in the loans in order to fund redemption requests.

The inherent risks associated with senior loans are similar to the risks of junk bonds, but have seniority in the event of borrower default so if the business is forced to sell its assets in a liquidation scenario, the senior loan will be paid first. In addition, senior loans are secured by assets whereas junk bonds are not, making them a more attractive investment option when constructing a loan portfolio.

For more trends in fixed income, visit the Fixed Income Channel.