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Investing.com -- Portfolio trading in the European corporate bond market is expanding rapidly, with a new trade occurring every 20 minutes and total volumes exceeding €250 billion in 2024.
However, Barclays (LON:BARC) expects Europe to lag behind the US due to its less liquid exchange-traded fund (ETF) market, though its growth potential remains strong.
"Europe lacks centralized trade reporting, and portfolio trades (PTs) are not specifically flagged," Barclays analysts said in a note.
The European corporate bond market has seen a 74% increase in portfolio trading since 2023, with strong traction in euro-denominated investment-grade bonds.
Barclays’ analysis estimates that "portfolio trading has firmly established itself in the euro-denominated investment grade (IG) market, capturing an 11% market share." The strategy is also gaining ground in less liquid segments such as high-yield and sterling bonds.
Still, Europe continues to trail the US, where portfolio trading accounts for 25% of the IG dealer-to-client market and 16% of the high-yield (HY) bond market, with a new PT occurring every seven minutes.
Barclays attributes this disparity to "the smaller less-liquid bond market, especially in ETFs, where cash volumes are over 10 times lower than in the US."
ETFs serve as a critical hedge for portfolio trades, enabling dealers to manage risk efficiently. In the US, ETFs facilitate trade execution and inventory recycling, but this mechanism is weaker in Europe.
"A deeper ETF market allows for easier and cheaper hedging of PTs, as dealers can execute large ETF trade orders without the risk of moving the market," analysts explain.
Nevertheless, Barclays sees room for expansion. The investment bank notes that "increased trading velocity, innovative products like sweeps, and new risk models that better internalize risks could help dealers free up balance sheet space."
These factors may push the European IG PT share from 10-12% to 18-20% within the next three years, though the structural limitations of the European ETF market could continue to hinder further convergence with the US.
"We expect the peak rate of portfolio trading to be lower in Europe than in the US, but still with room for growth,” the note concludes.