Designed for US high grade, high yield and emerging market bonds, the index will be a boon to bond investors who saw an aggressive credit market sell-off last week after Fed Chairman, Bernake, suggested that the Fed would taper its bond buying this year. It prompted bond prices to plummet and spreads to widen.
“The index acts as an economic indicator, rather than a tradable index, which is how we anticipate it being used – as an economic indicator where the investor can get a sense of the underlying liquidity,” Alex Sedgwick, head of research at MarketAxess told IU.eu. “If we look at the bond sell off over the last week, we can see that spreads widen as people cover themselves in order to ease the buying and selling pressure.”
The index is also anticipated to act as a proxy for the cost of trading in the market at that time. This means that – alongside many other indicators in the market – it could be used as a way to gauge when to get in and out of the market.
Sedgwick said: “We came up with this because the buy side of the market (which includes front office execution desks) was having trouble explaining to their customers the state of liquidity in the bond markets, how it felt and how it was moving.”
“Our data show us that if you look at the bid offers spreads historically – from 2004 and 2007 the long term outlook is still elevated, the spreads are still wider than pre-crisis levels. So there are still issues surrounding how much liquidity there is in the market,” he continued.
The index is calculated daily using executed trade data from publicly-disseminated FINRA TRACE data and also incorporates trade data from the MarketAxess trading system.
The index is currently being calculated exclusively in the US only, but there are moves to roll it out in Europe in the future.
Sedgwick said: “Our view on Europe is that any further transparency for trading is a really good thing.”