Fixed Income special report

Click here to download the PDF

The Name's Bond...

While Ian Fleming's fictional spy James Bond has remained a constant, the actors portraying him on screen have changed over the years, from Sean Connery to Daniel Craig. Similarly, in the world of fixed income, we refer loosely to "bonds" as an asset class, comprising assets that vary considerably, from rock-solid government and municipal bonds to various asset-backed securities.

And while we generalize about the "credit crunch" stemming from fixed income markets, in an age when one can securitize pretty much anything, it's the quality of the underlying that contributes to the value of each contract. For example, a contract comprising mortgages on over-valued properties sold to people who can't afford to pay off the loan stands a better chance of defaulting than a blue-chip multinational or a government institution.

Though there are strict rules about the information a dealer must disclose when selling a security, the key to any decision to buy or sell a bond-especially those that are less liquid or traded completely over-the-counter, rather than on exchange-like multi-dealer platforms-is each counterparty having detailed data and robust analytics on the contract itself, its underlying, and any data inputs used to value both. The buy side is now increasingly demanding this data from vendors and dealers, and is forcing firms to justify and defend their valuations.

For example, according to Lee Sanders of AXA Investment Managers, investors and traders are looking more closely at potential investments-even down to the underlying terms and conditions-and working harder to determine the "true value" of fixed income assets.

Also in this report, Damian Burleigh of Standard & Poor's describes some of the ways that vendors are responding to these needs, and the products being brought to market to provide deeper analysis, while Christine Sheeka of MTS Data outlines how firms are seeking new ways to derive more value from existing datasets.

Trading volumes are rising again, as is investor confidence in fixed income, with both the London Stock Exchange and Singapore Exchange launching new retail bond markets this year. But with the threat of over-extension into a double-dip recession, only verifiable data and solid business practices will ensure this confidence is well-founded, and not the kind of swagger seen in second-rate spy movies.