LATAM Local Markets Outpacing Hard Currency Volume for Onshore Investors

As with most other emerging markets, Latin America has seen debts returning to the radar among investors this year. This is partly due to the U.S.’s near-zero benchmark interest rates that has sent them searching for yield premium, and also because of an abundance of liquidity as a result of significant fiscal spending by regional governments.

The resurgent interest in fixed income is reflected in several indicators. In the primary market, the volume of cross-border bond issuance rose to $36.8 billion in the first half from $33.8 billion over the same period of 2020, as corporates including PEMEX and American Movil brought forward their refinancing plans to take advantage of the low-rate environment. For secondary transactions, data gathered from the MarketAxess platform offers an even more upbeat picture. Overall deal volume for LATAM clients in October posted an 91% year-on-year growth to a record, with Brazil and Mexico, two of our biggest regional markets, each reporting close to three-fold increases in activities.

Yet as an innovator in trading technology, what’s more important for us is that there are now finally signs of structural changes in the fixed income market that could forever transform the way our clients and we do business. For the first time since we began operating in the region, we are seeing volume in local currency bond trading outpacing those of hard currencies among local onshore investors on our platform. This carries particular significance for LATAM because local currencies account for as much as 80% of bond trading activities in the region.

Our data offers more detail into the strides we have made with clients in region. In each of the three quarters of this year we have recorded higher local currency trading volume than hard currencies, with an approximate 60-40 breakdown, and there’s no sign of the trend reversing in the foreseeable future. In addition, two accounts from each of Brazil and Mexico are now ranked in the top 10 in trading volume among all our local markets globally.

Just like other emerging markets, the transformation is taking place because traders have begun to realize the enormous benefits electronic platforms bring to their roles. Due to cultural barriers, bond traders in most Latin American countries have been reluctant to migrate from voice trading for local currency bond execution. But thanks partly to business disruption caused by the pandemic, many of them have taken the down time to experiment with platforms such as ours. After experiencing the level of cost-savings and access to liquidity that can only be provided through electronic platforms, they are now more convinced of the importance of embracing trading technology.

There are plenty of examples on how our technology is becoming more integral in the workflow among LATAM users, as products that have been instrumental in driving other emerging local markets growth on our platform are now also being adopted here. Two examples are our Request-for-Market (RFM) protocol, (up 42% YOY versus Q3 2020), which is our block-trading tool that allows investors to inquire and receive two-way pricing with no direction disclosure other than to the winning dealer, and our Switch Trading protocol, which allows the buying and selling of two securities in one package where one dealer takes it all. 

Another promising sign is that while it is bigger markets like Brazil and Mexico that are leading the way, in recent months even regional pension funds have started to adopt electronic platforms in their local currency trading. We continue to see adoption in e-trading in Peru and Chile, two countries that have traditionally been trendsetters among smaller markets, so we expect users in places such as Colombia to follow suit soon.

Despite these encouraging trends, the adoption of electronic trading for LATAM local has a long way to go. The reality is that in many offices, most bond deals are still done via voice auction and the phone. In addition, it is worth noting that LATAM local currency bonds have gone through a bumpy ride over the past few months, as lingering COVID-19 threat and political instability in some countries have led some international investors to switch to the more stable US-dollar denominated assets, meaning there is still plenty of room for electronic trading to expand in the region both in the long and short term.