A BDA Q&A with Brian Brennan, Head of Fixed Income Capital Markets at KeyBanc Capital Markets

Brian and I have worked together for more than a decade. I’ve long admired Brian’s dedication to his family, his faith and commitment to helping those who are less fortunate. His successful transition from an accomplished professional athlete to running highly successful complex businesses, while remaining focused on what is most important to him is what makes him so unique. Brian manages KBCM’s fixed income sales team that covers all the major bond investors as well as managing risk associated with significant inventory positions. He also oversees Key’s customer derivatives activities. His strategic acumen, infectious energy and commitment to his team are what have enabled him to be so successful. Beyond leadership, Brian is one of the most effective client-facing people I have ever met. He readily gets his energy each day from his personal approach to interacting with people. Finally, he is a dedicated husband, father, and grandfather with much to be proud of. Without question, I have benefitted both professionally and personally because of the time that I have spent with Brian.

As fate would have it, a quarterback named Doug Flutie arrived my sophomore year. Together, we were a good quarterback-wide receiver combination which helped to win quite a few games and with Doug we gained national attention.

The life blood of a regional dealer has always been about building investor relationships; and it still is today. I was able to build several long-term relationships based on trust as a salesperson. I moved forward at KBCM to help expand its fixed income product set as sales manager. Doug Preiser, KBCM’s Chief Operating Officer, appointed me Head of Fixed income in late 2007. He then appointed me Head of Derivatives in 2015.

Fixed Income has many sophisticated products that trade uniquely. Structured Products and Municipals trade much differently than United States Treasuries (UST) and corporate credit - investment grade (IG) and even high yield (HY). Technological advancements are creating a more transparent and efficient execution model. It has been clear for the last decade that the desire of our regulators is to have the fixed income market resemble the equity market. Systems continue to be implemented in the primary and secondary markets that are pushing more and more of the daily trade volumes through electronic execution. In this business, it is imperative to stay current on technology, but that is not always easy to balance with budget considerations. You need to be careful with each spend.

Today almost 60% of USTs are executed through an Alternative Trading System (ATS), and IG and HY credit is at 35%. Corporate credit issuance has experienced exponential growth the last decade from a float of approximately $5 trillion to more than $10 trillion. It is a huge market, so there is a lot of daily flow being executed across the MarketAxess, Trade Web, Bloomberg and other ATS platforms. Even in the more unique markets, the Municipals and Structured Products secondary market flows are seeing a pick-up of trades being executed through a platform.

This past year presented many challenges, starting with the interest rate environment, with the Fed being well behind the inflation curve. We saw 425 basis points (BPS) of rate hikes by the Fed. Add in spread widening across all asset classes for most of the year, and then try to hedge out the volatility in the market—this was not an easy exercise in 2022. Any firm with traditional products inventory exposure in 2022 most likely lost money trading. In some years you can avoid losses, but that was not the case for many firms this past year.

I remain hopeful for more favorable market conditions in 2023. Higher rates and lower volatility should provide a better secondary trading environment for all products. Additionally, Fixed Income funds left the market. Fund flows in all products were negative in 2022: IG had -$126 billion, HY had -$29 billion, and Munis had -$75 billion. This should reverse in a lower volatility environment.

In IG new issuance, a market in which we focus, 2022 volume was around $1.25 trillion, which is off 18% from 2021. Issuance will most likely be lower next year with the potential of a recession on CEO’s minds. M&A deals may continue to slow as funding for the transactions have gotten more expensive and rates have risen; however lower stock prices may help to offset the cost of funding. We shall see!

It has become increasingly difficult to navigate the entire market landscape as a bank or non-bank dealer. The many structural changes require dealers to invest across all aspects of their respective platforms to remain competitive, and at the same time margins are under pressure. Dealers need to continue to meet the cost of regulation through diligent compliance and upgrades in surveillance. The cost of technology for connectivity can be daunting, but without making the proper investment you will not see the flow in the secondary markets and in turn, not be able to execute. It is very challenging.

We have invested in our trading desks and made large investments in technology. For example, we have always had a strong commitment to trading the IG credit sector. We recently added two traders to build out an Algo, which is up and running. We are seeing trade count and volume increases with our IG clients. It is an exciting application for the group. Hopefully, the Algo will evolve to other products like Municipals.

So, I guess my biggest worry is whether we are hedged appropriately. We try to be thoroughly prepared for any market move, but when you have risk exposure across the different products, it isn’t so simple.