Bonds are having a “meme moment” on Reddit, Bloomberg reported.
A caveat first: The trend is not on par with WallStreetBets and its meme stock frenzy. The r/bonds subreddit forum only has some 8,000 members not 13 million. But the fact that laypeople are discussing bonds is still a noteworthy development for an asset class that never raised much enthusiasm from retail investors — or from anyone, to be honest.
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At their core, bonds are IOUs from either governments or companies — except that these IOUs can be traded (the BBC has a good Econ 101 explainer on the topic.) But to keep things simple, let’s say bonds are debt. And debt is boring, right?
Well, to most people, making money is never boring. When inflation rates are high and stock markets are volatile, this means looking for new sources of yield and diversification. We already looked into how this created tailwinds from alternative assets, such as passion investments.
Bonds aren’t exactly alts — the once-golden 60/40 portfolio rule used to recommend owning 60% of stocks and 40% of bonds. But it is fair to say that fixed-income offerings such as bonds are enjoying renewed interest, with Goldman Sachs wondering earlier this month if it was “time to switch from stocks to bonds.”
This is The Exchange, though, so today, we won’t dive deeper into why bonds are hot or the impact of U.S. Federal Reserve Chairman Jerome Powell’s latest comments. Instead, let’s focus on how startups are bringing overdue digital transformation to bond trading.
Overdue digital transformation
Stock traders no longer spend their day shouting on the trading floors, but bonds are still often sold and bought the old-school way: on the phone. The COVID-19 pandemic helped boost the transition toward electronic bond trading, but there’s a long way left to go, especially in emerging markets.
Founded in 2000, U.S. electronic trading pioneer MarketAxess saw its trade share of fixed-income transactions reach records in Q3 of this year, accounting for more than 20% of composite corporate bond trading.
“However, [MarketAxess’] focus has been in hard-currency bond markets, and they have not been able to develop this type of protocol for local-denominated, emerging markets securities,” Mexican investor Alejandro Diez Barroso wrote in a post.
Diez Barroso is a general partner at Latin America-focused venture capital firm DILA Capital, which recently co-led a $4 million seed round extension into Cicada, a fintech startup that shares similarities with MarketAxess and rival Tradeweb, but with a focus on emerging markets.
While Cicada is headquartered in Connecticut, its first market is Mexico, with hopes to later expand to similar Latin American markets and Brazil. Its co-CEOs, Ignacio Tovar and Javier Hernández, explained to TechCrunch that their product is centered on sovereign bonds, not corporate debt, with swaps as a second step of its product road map.
Hernández likened Cicada to New York-based bond platform Trumid, which raised private equity funding in 2021 at a $2.4 billion valuation. Just like Trumid forged partnerships with players such as J.P. Morgan and the Singapore Exchange, Cicada envisions itself as a potential partner to others in fintech.
“The infra play is all-important to us,” Tovar said, referring to Cicada’s positioning as a financial infrastructure startup. By making it easier to buy and sell bonds, it could enable others to innovate in the field and make fixed-income offerings available to a broader range of investors.
Trillions, with a T
Although the infra play was a factor in DILA’s and Kaszek‘s decision to invest in Cicada, its total addressable market was even more compelling, Hernández said. A former Morgan Stanley employee, he long ago understood something that many of us ignore: The bonds market is gigantic.
According to 2021 data from the Securities Industry and Financial Markets Association (SIFMA), global fixed income markets amounted to $123.5 trillion in outstanding securities, with 38% corresponding to the U.S. and 16% to emerging markets.
So far, most players in the bonds market are institutional, but this could change, and this time, emerging markets might not stay behind. For instance, Bloomberg reported earlier this year that at least 10 fintech platforms have emerged to sell corporate bonds to Indian retail investors.
Technology will be a key driver in enabling this democratization of the fixed income asset class — with more data being made available and artificial intelligence ready to take things one step further. For instance, Israeli startup BondIT recently raised $14 million to help investment managers leverage AI to automatically manage their clients’ bond portfolios.
In other words, a new wave of bond innovation is in the works, and we are here for it. Who said bonds were boring?