AI Case Study

Overbond predicts yields for new bond issues with less than 0.02 percentage point inaccuracy by using machine learning

Overbond uses machine learning algorithms to analyse real-time and historic bond data in order to predict new bond prices. Additionally it provides estimates of what the market demand might be for a bond and its yield.

Industry

Financial Services

Fund And Asset Management

Project Overview

Overbond's algorithms "crunch through credit ratings and real-time data on secondary trading for a firm and its peers, among other things. The service is already fully in place for the Canadian corporate-bond market, and partly so for the American one.
Of the 200 or so Canadian corporations that issue debt frequently, 81 are signed up to Overbond: a subscription buys tailored estimates of demand for new bonds, including the interest rate the market is willing to bear. This helps corporate treasurers gauge market conditions and decide when to issue bonds and in what maturity. Investors can use a basic version of the service without charge, partly because the firm collects data from them that then feed into the algorithms. They can, for instance, get estimates of the timing of the next bond issue to hit the market, using data on the timing of previous issues, issues by similar companies and balance-sheet data. It has refined its timing-prediction algorithm for the American market. Some bankers have expressed interest in using Overbond’s timing algorithm to help spot firms in need of financing before they come asking for it."

Reported Results

"Recent predictions for the yield on new bond issues have been, on average, off by less than 0.02 percentage points."

Technology

"[M]achine-learning algorithms powered by neural networks that predict the timing and pricing of new bond issues"

Function

Finance

Budgeting And Forecasting

Background

"With the exception of a few governments big enough to run their own auctions, anyone wishing to issue bonds must seek bankers’ help. A hefty fee will buy assistance in calibrating the size, structure and timing of a bond issue, as well as connections to lots of buyers. And once a bank has agreed to underwrite an issue, it bears the risk of failing to get a good price for the bonds. But the process is old-fashioned and inefficient, and the accuracy of the advice is hard to gauge... comparing primary and secondary markets has been difficult. By crunching a wide array of public data, Overbond seeks to provide a link between the two.
...the firm now hopes to break into America, the world’s largest corporate-bond market with around 3,000 new issues annually. There, issuance is much more fragmented. Around 40 banks are active in bond origination, and no firm has more than a 12.5% market share."

Benefits

Data

Public: "credit ratings and real-time data on secondary trading for a firm and its peers... in America, for instance, information on the price, timing, yield and volume of all bond transactions must be reported publicly within 15 minutes".