What You Need to Know

Fixed-income investing hasn't kept up with the rapid pace of technological innovation in the rest of the financial industry. But that's about to change. Machines will empower humans to achieve unique insights and act faster in a market where speed and alpha are inextricably linked.

of US corporate bond trades are still executed over the phone

Number of risk factors on which fundamental analysts rank bonds on Prism

Savings from executing a complex trade same-day using technology

The Digital Revolution Is Coming To Fixed Income

Artificial intelligence, automation and predictive analytics are transforming virtually every industry, but bond investing hasn't really changed. The typical investment process is inefficient, from research and portfolio construction to trading. But this story will change as human and machine join forces. In the next few years, we expect the rise of fixed-income technology to open a wide gulf in performance between those managers who have integrated cutting-edge tools into every stage.

In the past, the quest for excess return (alpha) was dominated by either the superhuman bond investor who attempted to singlehandedly navigate global markets or the quantitative shop that could exploit inefficiencies in the short term but couldn't see the bigger picture.

In an information-heavy world, just sticking with the status quo won't be good enough. It's imperative to integrate technology into the investment process to provide managers with tailored information that enables faster decision-making, makes every step of the process more efficient, and provides a more complete picture of risk and opportunity.

Several firms have used a "best of breed" strategy, creating or sourcing individual tools to help in one specific area of investing, such as research, trading or portfolio management. That's a good start, but to stay ahead, firms will need to focus on how these tools work together to create an ecosystem that magnifies the human impact.

Building Liquidity: Turning Puddles Into Pools

Liquidity is the number-one issue influencing a fixed-income manager's ability to create alpha. Firms that can't effectively assess a bond's liquidity won't be able to implement their investment ideas. And if a trade can't be implemented, there's no way it can make money.

"Liquidity pools," or markets that provide liquidity for credit securities, have long been highly fragmented across multiple external third-party sources. The information provided by these sources is valuable, but it's inefficient to continually monitor each one and then compare and contrast the data.

To keep up in a marketplace that will digest and react to every new bit of information faster and faster, successful fixed-income managers will need to use technology that pulls all external fixed-income trading platforms together in one place. Firms that adopt this technology can become price makers instead of price takers, resulting in better executions, lower transaction costs and faster investment of new cash inflows.

These kinds of trading platforms aren't theoretical anymore.

In 2016, we developed ALFA (Automated Liquidity and Filtering Analytics) with this need in mind. By aggregating separate pockets of existing market data into a single user interface and enabling our traders to filter by specific identifiers or security characteristics, ALFA helps AB traders make better, more informed decisions on the price levels at which less liquid and illiquid securities should trade. The objective is to be able to buy bonds for clients' portfolios at the lowest price and sell them at the highest price.

ALFA can also alert our traders when certain market events occur. In February 2017, for example, ALFA flagged to one of our emerging-market debt traders that an unusually high number of dealers were offering bonds issued by the Brazilian Development Bank (BNDES), one of the largest development banks in the world. Our trader took a closer look at the offers and discovered that BNDES was trading at a lower valuation than the bonds of another large Brazilian bank, Caixa Econômica Federal (CAIXBR), which we deemed to be a fundamentally weaker credit.

Find out more about Abbie and review our checklist to see if your asset manager is ready for the digital future in the full white paper.

Past performance, historical and current analyses, and expectations do not guarantee future results.There can be no assurance that any investment objectives will be achieved. The information contained here reflects the views of AllianceBernstein L.P. or its affiliates and sources it believes are reliable as of the date of this publication. AllianceBernstein L.P. makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized. Past performance does not guarantee future results. The views expressed here may change at any time after the date of this publication. This document is for informational purposes only and does not constitute investment advice. AllianceBernstein L.P. does not provide tax, legal or accounting advice. It does not take an investor’s personal investment objectives or financial situation into account; investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by AB or its affiliates.

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