Don’t Miss PIMCO’s 3 Trading Tips for Bond Investors

As pioneers in the active bond ETF category, PIMCO brings an enormous amount of experience and insight to the table. Tanuj Dora, PM, Head of ETF Capital Markets at PIMCO, discussed the active bond revolution in markets, shared trading tips, and why active management and ETFs are such a great marriage. 

Transcript

Opening:  Active Manager Benefits in ETFs

Dora: Most fixed income indices have thousands of bonds. In most cases, you're not getting delivered all thousand bonds.

So you always have to make those trade-offs. You always have to make those decisions. And that's what we really do well as an active manager. We engage with market makers, APs on those custom create baskets.

How MINT and BOND Paved the Way for Active Bond ETFs

Nadig: Hi there, Dave Nadig. I'm here with Tanuj Dora, the Head of ETF Capital Markets for PIMCO. Tanuj, active management, story of the conference, everybody's talking about it. You guys were the first ones out of the gate with MINT and BOND, two actively managed short-term and then total return ETFs. How's the space changed, and how's PIMCO's position in it changed along with it?

Dora: Yeah, we've been doing active fixed income ETFs for the longest time. We were kind of doing it before it became really cool. You know, MINT, which is our ultra-short strategy, was launched back in 2009. BOND was also one of the first core plus bond ETFs out there, has a long story track record.

But ever since, active fixed income has been sort of super popular the last couple of years. $100 billion dollars in flows this year alone, which is about 40% of fixed income ETF flows. So it's no longer the niche. It's starting to become from the niche to the norm in terms of fixed income flows.

I think active is how many advisors have preferred to allocate to fixed income. And now the products have come to age in terms of scale, track record, size, liquidity. So there are many more options available, and advisors are putting their money where their mouth is.

3 Trading Tips for Bond Investors and Advisors Alike

Nadig: So, you're also on the capital markets desk on top of being a co-PM on some of the funds. You're dealing with advisors who are trying to get money to work. You're dealing with the Street trying to understand how to do creation redemption, in and out of bond products, which isn't always straightforward. What are some mistakes that advisors are making, and some best practices people can walk away with?

Dora: Yeah, some of the simple ones which we tell advisors is when you're trying to execute trades, a: focus on limit orders instead of market orders. Focus on block trades, contact the specialist, either in your trading team or your custodian's block desk. Or work with us as ETF capital markets experts to get you the adequate liquidity you want.

Try and avoid open and closes – closing auctions are very popular in equity markets, but that's not necessarily where bond market liquidity is concentrated. So, if you can avoid that time of trading, you can, that might suit you. Those are some of the simple practices we mention.

Nadig: So sort of trading in the belly of the smile, as it were, is where to go after fixed income?

Dora: Yeah! There's no dearth of liquidity in fixed income markets. That's for sure. You just need to access it in the proper fashion, whether it's working with the capital markets team, whether it's working with market makers and APs to get block liquidity. Any fixed income ETF is tethered to the underlying liquidity of the bond market. So, if you trade in certain best practices, engage with the right people, you can access the liquidity of the underlying market to get superior execution.

Nadig: And when we talk about the higher end of this – the institutional scale – you know, PIMCO has access to markets that a lot of fixed income managers don't, just because of your sheer scale. Does that change the creation redemption process? Would you rather be the ones doing the trading or are you out there putting big baskets into the Bloomberg terminal for people to fill out?

Digging In: The Creation and Redemption Mechanism in Bonds

Dora: Creation redemption in fixed income has changed a lot since 2019, 2020 6c-11 Rule allowed custom baskets. Really what custom baskets do is you can pick and choose bonds for a creation. Most fixed income indices have thousands of bonds. In most cases, you're not getting delivered all thousand bonds. So, you always have to make those trade-offs. You always have to make those decisions.

And that's what we really do well as an active manager – to make those trade-offs and make those decisions. So, we engage with market makers, APs on those custom create baskets. We also pride ourselves in having best in class trading resources. So, if someone wants to give us cash, we can deploy our trading resources and get the best possible execution outcome for both cash or in-kind creations.

Nadig: So, in the old days when this was kind of just a cash-in, cash-out business, those days are pretty much gone at this point? Or are there some funds where you'd still just would rather be dealing in cash?

Dora: I think it's a mix of both. I think it's a mix of both to get the most optimal outcome. There are some markets which are difficult to deliver in-kind, so in those markets we prefer to do cash. But it's really a process to get the best outcome for the client. And that you can do by making your creation redemption process – picking and choosing between cash, in-kind to just deliver the best outcome for the client.

Nadig: And in a fixed income market which has been anything but boring for the last four or five years, that flexibility's got to be key. Tanuj, great catching up.

Dora: Yeah, thank you.