Why technological advances could prove a game changer for corporate bond investors
Traditionally resistant to change, the corporate bond market is now embracing new technologies that should make it easier for advisers to better serve their clients.
The pace of technological progress is accelerating, and profound developments have already taken place in financial services. The corporate sector, which has traditionally proven resistant to change, is no exception. We explore the advances likely to take place and the positive implications for investors.
The marketplace for corporate bonds
The Australian Financial Review (AFR) recently described the domestic Australian non-bank corporate bond market as “sub-scale, bordering on anaemic”. There are various reasons for this lack of allocation, including an equities culture. The AFR explains:
“The great super ‘experiment’ has also fuelled this attitude. We couldn’t have picked a better year – 1992 – to start our ‘risk-on’ super system. Equities went on a tear as discount rates consistently fell for roughly 30 years. Looking back, it’s been a winner.”
The difficulty of accessing corporate bonds has also been a factor. This partly reflects regulatory issues in Australia, which make it more difficult for ordinary Australians to invest in corporate bonds than is the case for their counterparts in the US or continental Europe. But there are also higher costs and barriers to entry that afflict investors around the globe.
Fortunately, the technological advances already driving change in other areas of financial services are now coming to the corporate bond market in Australia and elsewhere. Much of the progress is being driven by small, innovative firms specialising in financial technology (Fintech).
For example, Bloomberg has reported that new AI-powered tools are helping US corporate bond investors make electronic trades with increased transparency in what is a “notoriously opaque” market. The US tends to act as an incubator for new ideas, which then spread across the rest of the world.
Bloomberg explains that the corporate bond market has lagged in modernising its trading process, making it more cumbersome to execute trades. Most corporate bonds are still generally traded over the phone.
However, recent advances in AI, such as OpenAI’s GPT-4, have sparked intense competition among technology companies to develop AI-powered products for use in many industries, including finance.
Advantages to investors
AI can help investors by reducing transaction costs. It does this by analysing the market and subsequently identifying the best time, size and venue for trades.
The ability to analyse huge quantities of data also allows investors to build better portfolios and manage risk more effectively. The consultancy Deloitte, for example, has described AI as a game changer for risk management. AI can assess the creditworthiness of borrowers, predict potential defaults, and evaluate the overall risk exposure of a portfolio.
AI is also driving the establishment of more and more electronic exchanges, making it easier, quicker and cheaper to trade bonds.
In other words, AI is helping to make the corporate bond market more liquid. That is critically important to investors. It means that if they need to sell their bonds, they can, while the range of opportunities they can invest in will also grow significantly. ABE can help advisers and investors gain access to the corporate bond market and take advantage of these market-changing advances.
This article contains general advice only. You need to consult with your independent financial, tax and/or legal adviser, and consider your investment objectives, financial situation, and your particular needs prior to making an investment decision. Australian Bond Exchange Pty. Ltd. and its authorised representatives does not accept any liability for any errors or omissions of information supplied in this document except for liability under statute, which cannot be excluded.