Turbulent markets put focus on evaluated pricing
24-05-2022 | treasuryXL | Refinitiv | LinkedIn |
Fixed income volatility looks like it will be around for a while, due to whipsaw-like changes in the overall economic environment. In such an environment, firms need to have the right evaluated pricing to ensure they are pricing their portfolios at fair value levels and that they are complying with regulations.
- Fixed income prices are experiencing volatility because of the rapidly changing global economic outlook.
- Accurate fixed income pricing – including evaluated pricing – is more important than ever.
- Refinitiv Evaluated Pricing Services provides enhanced transparency, expertise, and data connectedness.
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Over the past three years, fixed income indices have had to address significant market volatility as a result of world events. Just 12 months ago, interest rates were at record lows, while today central banks are boosting rates at a rapid clip.
Economic growth projections are being rewritten more frequently than the British weather forecast – in the UK, four seasons are often experienced in one day.
What is evaluated pricing?
In these turbulent market conditions, getting the bond pricing that underpins fixed income indices to be most representative is essential.
Most bond transactions are privately negotiated, and so fixed income trading – and the indices that track it – relies more heavily on evaluated pricing, unlike equities.
Evaluated pricing is an approach that combines the advantages of mark-to-market and mark-to-model, to generate prices for fixed income instruments. It will price instruments on a mark-to-market basis when that is possible and will use methodologies and models to produce a fair value when that’s required.
Models can have a range of inputs, depending on the fixed income instrument being tracked.
Pricing high yield debt
A good example of recent trends is the high yield bond market.
In 2021, this market saw a surge in both issuance and interest from investors. In an economic environment characterised by very low-interest rates and surging economic growth, the returns on high yield bonds – also called “junk bonds” – looked very attractive.
Now, in the first few months of 2022, the situation has completely changed. With rising inflation and interest rates – and an unsettled economic outlook – high yield debt looks much riskier.
In this rapidly changing environment, getting the evaluated pricing right is more important than ever.
High yield bonds need to be individually evaluated, mostly on a price basis using the lead underwriter as a primary source of information. This is a process that requires considerable expertise, particularly when an individual high yield bond is not traded very often.
Earlier in 2022, FTSE Russell moved to Refinitiv Fixed Income pricing to support the FTSE U.S. High-Yield Market Index, as well as the indices that derive their membership from it.
The FTSE U.S. High-Yield Market Index is a U.S. dollar-denominated index that measures the performance of high–yield debt issued by corporations where the country is assigned as Australia, Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States according to FTSE’s methodology.
At the same time, FTSE Russell also moved to Refinitiv Evaluated Pricing for the FTSE Dim Sum (Offshore CNY) Bond Index, which measures the performance of offshore Chinese Yuan ‘Dim Sum’ bonds that are issued and settled outside Mainland China.
The index covers fixed-rate securities issued by governments, agencies, supranationals, and corporations.
“In evaluating the potential to change the price source on our indices, we carefully considered both quantitative and qualitative assessments, reviewing these within the rigour of our governance processes, ” said Marina Mets, managing director at FTSE Russell, also an LSEG company.
She added: “The quality, accuracy and transparency of the Refinitiv Evaluated Pricing Service fixed income data was found to be very strong and very comparable to the other evaluated pricing offerings we assessed. The review ended with FTSE Russell deciding to use Refinitiv Fixed Income pricing, including the Refinitiv Evaluated Pricing Service, for these indices.”
Delivering high-quality pricing
In order to ensure quality, Refinitiv evaluated pricing data is subject to an extensive range of controls.
The team collates data from numerous, trusted sources, including exchanges, issuers and underwriters. This data is checked and maintained by the Refinitiv global teams of data analysts and experts who actively monitor data quality and continually improve processes. Many of these staff speak local languages and are closely connected to local markets.
In fact, one of Refinitiv Evaluated Pricing Service’s strengths is its global reach – its ability to collaborate and coordinate between geographic locations.
Another strength is transparency – customers can speak directly with the team generating the prices, and those relationships are thought of as true partnerships by the Evaluated Pricing Services team.
High-quality news and financial information sources
These teams have access to high-quality news and the financial information of the companies being monitored, including the Refinitiv Eikon terminal, in addition to news from Reuters and International Financing Review, as well as credit default swap curves, central bank information, company financials and other sources.
They also have deep connections with market participants and ongoing access. The evaluators themselves have high-quality skill sets and substantial subject matter expertise.
This deep expertise means that sometimes Refinitiv will be the only vendor in the marketplace providing a price for some very hard-to-value fixed income instruments.
In addition, Refinitiv Fixed Income data is available through a range of delivery platforms and benefits from the proprietary Refinitiv identifier system, PermID.
In today’s volatile fixed income trading environment, it’s important for firms to be able to trust their sources for evaluated pricing. The Refinitiv Evaluated Pricing Service team has a wide range of information sources at their fingertips coupled with deep subject matter expertise. For firms seeking robust evaluated pricing, this is a winning combination.
