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Thought Leadership: The Future of Fixed Income

Posted November 9, 2018

Leading fund managers are continuing to explore how Artificial Intelligence, the powerful off spring of the Big Data revolution, might transform the staid world of fixed income, especially in the institutional sphere.

Fixed income investing hasn’t kept up with the rapid pace of technological advances in the rest of the financial industry. That is about to change, forecasts a new research paper from Alliance Bernstein. Machines will empower humans to unlock unique insights and act faster in a market where speed and alpha are inextricably linked.

AB does not mince its words in this report when it comes to describing the challenge facing institutional fixed income investors, who it argues need to leap forward from 1989 to 2019:

“For many fixed-income managers, technology is stuck in the land that time forgot. Roughly 80% of US corporate bond trades, measured by notional value, are still executed over the phone. The biggest innovation in credit research until very recently? Microsoft Excel. And that was back in 1985”.

For insurers, the paper argues the powerful new technology tools being built using AI will be transformative: “Artificial intelligence, automation and predictive analytics are transforming virtually every industry, but bond investing hasn’t really changed. The typical investment process is inefficient, from research and portfolio construction to trading.

“In the next few years, we expect the rise of fixed-income technology to open a wide gulf in performance between those managers who have integrated cutting-edge tools into every stage of their investment processes and those who haven’t”.

Specifically, the reports highlights three areas where it expects AI-powered tools to be a major benefit:

  • Investing incoming premiums quickly enough to avoid dragging down portfolio returns.
  • Considering credit-universe restrictions (sector, issuer, rating or maturity) in real time to identify which opportunities are appropriate for individual insurers.
  • Optimising portfolios with new tools to effectively balance yields and credit risk, instead of simply focusing on yield alone.

The key question for CIOs is: are their managers and advisers equipped for this revolution?

The future of fixed income: How technology will revolutionize asset management from Alliance Bernstein can be downloaded here

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