APAC bond trading navigates volatility with sharpe ratio and liquidity

From an investment perspective, there are different metrics to look at.

Amidst the market volatility in Asia-Pacific (APAC), bond traders and investors are increasingly relying on metrics and enhanced liquidity to manage risks. 

Riad Chowdhury, Head of Asia-Pacific at MarketAxess, emphasises the importance of the sharpe ratio and access to liquidity as crucial factors for navigating the challenges posed by fluctuating market conditions.

“[Sharpe ratio] is basically a measure of any excess returns an investor might earn over risk free assets, let's say like US Treasuries, and that's adjusted for the volatility of returns achieved by those investors,” he said.

Chowdhury explained that this ratio allows investors to gauge the risk-adjusted return on investments, providing a clearer picture of potential gains relative to the volatility encountered.

From a trader's perspective, Chowdhury pointed out that access to as much liquidity as possible becomes paramount in volatile markets to ensure trades can be executed at the best possible prices. 

“That's particularly important because in volatile markets, prices could be moving around, sometimes significantly. And that's actually one of our core strengths as a platform where we try helping our clients to find the best possible liquidity that they could get,” he explained.

Looking ahead, automation and electronic trading protocols are poised to play a crucial role in the evolution of bond trading. These technologies promise not only greater efficiency but also a profound impact on how trades are executed. 

Automation facilitates data-driven decision-making, the pursuit of the best available liquidity, and the execution of trades in the most efficient manner possible. Chowdhury views these factors as the driving forces behind today's bond trading dynamics and anticipates their continued influence in the future.

“It's about doing all those things in the most efficient manner. And these are the factors that I think are driving bond trading today and likely to continue to do so in the future,” he said.

As for the trends shaping APAC's bond trading performance this year, Chowdhury forecasts two primary influences: global macroeconomic factors and market structure innovations. 

He explained that the policies of the US Federal Reserve stand out as a significant determinant, with market volatility closely tied to the Fed's narratives on interest rate movements. Furthermore, structural advancements spearheaded by firms like MarketAxess, through data and information utilisation, liquidity access, and efficiency via automation, are expected to mould the bond market's trajectory.