Lynn Norris:
Welcome to Navigating Beyond the Expected, a podcast from Truist Securities. Technology has been transforming how credit markets trade for years, but increasingly it's also changing how companies make decisions about when and how to raise capital. With better data providing insights on market demand and new tools helping predict order books, the process of offering debt to investors is becoming faster and better informed, but also more complex. Yet even in a world full of algorithms and artificial intelligence, human judgment still plays a critical role in understanding risk and telling the story behind a credit offering. I'm your host, Lynn Norris, and today I'm joined by Gary Rapp, head of Fixed Income Sales & Trading at Truist Securities, to talk about how these changes are reshaping decision-making for issuers and why experience still matters. Gary, welcome to the podcast.
Gary Rapp:
Hi, Lynn.
Lynn Norris:
Gary, let's start at a high level. When people talk about technology transforming credit markets, what does that mean in terms of how decisions are made?
Gary Rapp:
Everybody has been talking about electronic trading for the last 10 years. So it's not about electronic trading in general, but really about how trading desks are using all the information and all of that new technology to change not just how they're trading, but the speed at which they're making decisions, allocating their portfolios, and the products that they're using to make the best investment decisions at a pace that we haven't seen before.
Lynn Norris:
So on the trading side, it's about speed, but how does that flow through to the origination side? How does all that instant data start to influence how companies come to market with a debt offering?
Gary Rapp:
It's changing the way in which our capital market partners are advising their corporate clients on when they should go to market and with what type of structure they should go to market. This obviously has been evolving over the past few years in terms of the platforms that are aggregating order books for the new issue process. But even more importantly, going forward, people now have much better data in terms of all of the recent trades. What investors have been buying their securities? What investors have been selling their securities? What investors are going further out the curve and adding duration? And this is all giving our capital markets partners much better information in terms of predicting who is going to be playing into a new issue. And potentially AI now can give you a prediction in terms of what an order book is going to look like before an issuer even goes to market.
Lynn Norris:
So what does that change for a company or a CFO making that decision? How does it affect timing or pricing when they're thinking about issuing debt?
Gary Rapp:
It will make everything more efficient and faster. So I think you will have a better indication as an issuer in terms of what your order book most likely will look like, where potentially you're going to have the greatest demand, and therefore it can be slightly more aggressive in the initial price talk when you go to market.
Lynn Norris:
Is that part of a broader shift in how credit markets function? Are they starting to behave more like equity markets?
Gary Rapp:
Everything that we've been doing and talking about in terms of this technology and the changing ecosystem within fixed income is basically the equitization of fixed income markets. So this should give the retail investor as well more access to better pricing, more transparency, and allow them to be able to trade more products going forward, whether it is private credit, investment grade, public bonds, structured credit, it will increase the trading access.
Lynn Norris:
More and faster information and wider investor access should, in general, mean better overall liquidity for bond issues. But I know some people are worried that all the automation and the need for essentially instant decision-making could make the market much more fragile in terms of volatility, that the computers may not be able to keep pace or understand market dynamics. Is that a concern?
Gary Rapp:
In the past, liquidity immediately dried up much faster when there was volatility. Today, I think technology has improved, the algos have improved, and everything is changing so quickly. Initially, these algos, when you got a spike of volatility, a lot of the algos would immediately turn off and stop trading. I think one of the improvements that we've really seen is these algos are becoming increasingly sharp and much better at handling the volatility of the marketplace. And now we don't need to immediately turn off our automatic pricing engine when you do get negative headlines. And in a period of volatility, you really are starting to see how much some of the technology has improved and the consistency in the pricing. And that consistency in the pricing has allowed the depth of the bid and the depth of the offer on screens to increase. And that allows for the entire infrastructure of the ecosystem to be able to rely upon this technology that much more.
Lynn Norris:
Well, then, with all of that automation and prediction, where does human judgment still matter, especially for companies making these kinds of decisions?
Gary Rapp:
We've been talking about technology and all of the data, and all of that is really, really important. And yes, the world is going more and more in that direction, but still the relationship matters. And at the end of the day, this is still credit trading and credit risk. And people need to be able to understand that credit risk. When we're doing a new issue for a high-yield company or on the leveraged loan side, the biggest differentiator for Truist is having a salesforce that is highly experienced, has seen a number of these deals before, has seen the challenges from a credit standpoint, and being able to tell a story that makes sense that sophisticated investors understand and buy into. There are new challenges and concerns from an investor standpoint out there today that haven't been before. Ironically, a lot of these concerns, as much as they're about AI disruption, the people who are able to really think about and understand how the world is changing and what the implications are potentially for a corporation and their credit spreads are best understood by people and by the sales force who has 15, 20, 25 years of experience selling and distributing a corporate bond.
Lynn Norris:
So if that's where things are today, what does the next phase of that evolution look like?
Gary Rapp:
AI is going to become a much bigger part of how we are looking at all of the data that we've been talking about and helping us make better investment decisions. The speed at which we can now use AI to be able to look at some domino effect or implications of a headline is so much faster. Technology is going to change the way in which you potentially issue securities. There is a lot of talk now about tokenization and being able to issue a tokenized bond that would actually trade on a digital ledger. So I mean, think about the benefit of crypto, where you have the ability to transact 24/7 instantaneously and remove a lot of the settlement friction in that security. So if you had a tokenized bond, for example, you would be able to potentially buy or sell a bond 24/7, the settlement would be instantaneous, and you would immediately be able to see it in your digital wallet.
Lynn Norris:
That feels like it would be a big change to the fixed income environment and another example of that equitization you were talking about before. How close are we to actually trading tokenized bonds?
Gary Rapp:
There's still a lot of regulatory work that has to get settled before that because obviously there is a significant amount of regulations surrounding the security industry, and you're dealing with all these rules and regulations that have been built up over a significant amount of time. And I think first you really need to have some more guidance in terms of if something is a digital asset, how is that actually regulated? The architecture is changing, but the actual security doesn't change; the risk doesn't change. So from a regulatory standpoint, how different should the rules be for that of a digital tokenized bond or tokenized security versus a traditional security? And should there be a difference between the two? In my view, there shouldn't be arbitrage between the way in which a security is traded on one platform or format versus another. Because theoretically, you could have two securities that are exactly the same, traded potentially differently, that have different rules and regulations. You put all of these safeguards in place for a reason, and just because they're traded under a new technology doesn't mean that you don't want to afford your consumer the same protection.
Lynn Norris:
so if you had to sum it up, what's the most important thing a business leader should understand about how these markets are evolving?
Gary Rapp:
I think the takeaway is that technology has changed not only the actual products and will continue to evolve the products that we're trading, but the way that we are interacting with our clients and all of the workflow. Having said that, people still are instrumental in the day-to-day and building the relationships to make the business successful. And we know the change is going to continue. That's the one thing that we know for certain.
Lynn Norris:
Gary, that's a great perspective. No matter how much technology may change how markets trade and how leaders are making decisions, the ultimate success of a deal still depends on human judgment and relationships. Thanks for walking us through it.
Gary Rapp:
Thanks, Lynn. I really enjoyed the time.
Lynn Norris:
And, listeners, thank you for joining us on Navigating Beyond the Expected. Each month, we bring you new conversations with Truist Securities experts on the issues shaping corporate and investment banking. Subscribe today so you never miss an episode and check out more Beyond the Expected insights, videos, and articles at Truist.com/beyond. You can also subscribe to I've Been Meaning to Do That, the podcast from Truist Wealth at Truist.com/DoThat. I'm Lynn Norris, and we'll see you next time.
Truist Securities is the full service corporate and investment banking arm of Truist Financial Corporation. With a rich history extending back more than 125 years, Truist Securities offers a robust capital markets and investment banking platform that includes a comprehensive array of strategic advisory, mergers and acquisitions, and capital markets capabilities for corporate and institutional clients, including sales, trading, and research services in both fixed income and equity. The firm also provides corporate finance, asset finance, risk management, liquidity, and treasury management solutions to meet clients' full spectrum of financial needs. Securities and strategic advisory services are provided by Truist Securities Incorporated, member FINRA and SIPC. Lending, financial risk management and treasury management and payment services are offered by Truist Bank. Deposit products are offered by Truist Bank member FDIC. Headquartered in Atlanta, Truist Securities has offices located across the US. Learn more at www.TruistSecurities.com. This podcast is for informational purposes only. Opinions expressed in the podcast are current opinions only as of the date of recording.
