South African corporate bond traders mostly rely on Mark-to-Market (MTM) as a proxy for underlying bond prices. Infrequent trading often leads to stale MTM spreads (yields for fixed coupon bonds).
We’ve addressed this issue by modelling more accurate spreads enabling market participants to make informed trading decisions. Addendum’s sophisticated model updates daily and draws on multiple data sources, including proxy – and – synthetically manufactured data for illiquid bonds. Using Addendum’s modelled spread in combination with MTM should lead to significantly better trading outcomes.
Below are two examples visualising the movement of MTM compared to Addendum’s modelled spread on a bond level:
Figure 1: MTM vs Modelled Spread – DSY06
Figure 2: MTM vs Modelled Spread – EXX05
Mark-To-Market Spread (Red Line): The MTM spread follows a “staircase” pattern, updating infrequently with abrupt changes, leading to unexpected price shifts and increased uncertainty for market participants.
Addendum’s Modelled Spread (Blue Line): Addendum’s spread follows a smoother, daily-updated curve, providing market participants with a more accurate, timely, and reliable pricing model that reduces volatility and improves decision-making.
Our platform shows the modelled spread for each posted instrument.
More granular information can be accessed via the analytics icon throughout the platform. This provides a snapshot of bond-specific metrics.
Figure 3: Modelled spread on Addendum Marketplace
Figure 4: Analytics for NTC35 on 2 May 2024
Figure 4 represents a trade concluded via the Addendum Marketplace. For this trade, MTM was 14.43% higher than the traded spread. Addendum’s modelled spread moved in line with market expectations, and differed from the traded spread by a mere 2.27%.
In this scenario we can conclude that Addendum’s modelled spread was able to pre-empt the change in the traded spread since the modelled spread is updated daily and is not trade dependent.
