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Bond traders — exhausted new stars of financial markets


Ļaughing Ģor:
October 14, 2012

LONDON, Oct 14 — Three years of crisis in the euro zone have thrust the once-sleepy government debt market into the public spotlight and transformed the way bonds are viewed, valued and traded.
Huge debts run up by governments since the euro’s creation in 1999 have turned the bond market, which financed a decade of fiscal excess using its huge pool of faithful investors, into an arbiter of economic policy capable of fracturing the euro zone.
With those investors now far choosier, once arcane movements in bond yields have become the main indicator of the euro zone crisis, and the borrowing costs of struggling countries such as Spain determine whether they have to be bailed out.
As a result, government bond traders have emerged from the shadow of the credit market, where private debt is raised and traded. This market had generated huge profits and drawn all the dealing room kudos over the previous decade due to a boom in complex, mortgage-based debt instruments — the very business that led global markets into the abyss.
“We’re no longer seen as second-class citizens when compared to credit. We’re as much at the forefront of helping clients successfully navigate one of the toughest markets in a generation,” said Carl Norrey, head of rates securities at JP Morgan in Europe, the Middle East and Africa, who oversees the bank’s government bond trading.
The challenge is that investors now believe wealthy countries can default on debt, just like home owners and firms.
That shift began when a new Greek government revealed the disastrous state of its public finances in 2009, forcing investors and traders to rip up their assumption that bonds sold by any euro zone country were of roughly similar quality and risk-free.
In the chain reaction witnessed since then, Greece has effectively defaulted on its debt, investors have abandoned Ireland and Portugal and, despite a series of previously unthinkable central bank measures, Spain is teetering on the brink of becoming the bloc’s next state to seek a bailout.
As a result, the gap between the highest and lowest-yielding euro zone government bonds — those of Germany and Greece — has widened to 17 percentage points from only a quarter of a percentage point five years ago.
Traders can therefore no longer rely on making money by dealing large volumes of low-commission trades that capitalise on small pricing distortions.
Finding zen
To survive at an investment bank these days, once specialised bond traders need much broader knowledge of the countries on which they concentrate, ranging from government and private debt to day-to-day political developments.
This is particularly the case for nations on the euro zone’s “periphery” such as Greece and now Spain.
Morgan Stanley merged its peripheral government bond and credit trading units in 2011 to adapt to these changes, said Angelie Moledina, who co-heads rates and government bonds trading at Morgan Stanley in London.
At JPMorgan’s London offices, traders have switched from specialising in all euro zone bonds with a particular maturity to become experts in all debt issued by a single country.
How traders work has also changed. Deals must be carefully timed to get the best price from volatile markets, where there are fewer buyers and sellers than half a decade ago.
Before the crisis erupted, money was made or lost on moves of one-hundredth of a percentage point — one basis point — or less. Now, much larger swings happen daily and government bond dealers have to seek calm outside work, as their colleagues on traditionally more volatile markets have long had to do.
“Three years ago, a 10-basis-point move was quite stressful. Now it becomes a fact of life — you adjust your positions accordingly and learn to live with it,” said Guillaume Amblard, global head of fixed-income trading at BNP Paribas. “At the end of the day you need to find ways outside of work to keep zen.”
That can be hard when prices are more sensitive to political announcements at any time of day or night than to the scheduled economic data that once chiefly moved the market.
For example, Italian bond yields fell almost a full percentage point on December 5 last year after the government in Rome announced sweeping budget reforms, only to rebound fully in the next three days because expectations that the European Central Bank would buy its bonds subsided.
Traders typically sit behind banks of six to eight screens juggling price watching with scanning for market-moving news.
One trader at a European bank, who declined to be named, said he monitored feeds from five different news agencies as well as continuously checking websites and social media feed Twitter.
This is a far cry from the days before the crisis when lunches sometimes stretched long into the afternoon and traders left the office minutes after markets shut, virtually switching off from news headlines until the next day.
Drought mentality
Bigger price moves can mean bigger profits, but can also inflict huge losses that devastate investors’ portfolios. This has prompted many investors to quit the worst-hit euro zone bond markets and changed the way traders work.
The fewer buyers and sellers there are, the less liquid the bond market becomes.
This exaggerates price swings and forces traders to break up big single trades into smaller amounts that will be bought or sold gradually during the course of a whole day to avoid moving prices, rather than with a single click or phone call.
The human touch has therefore become more important. While trading in financial assets has generally been moving towards offering and accepting prices on a computer, traditional over-the-phone transactions proved an invaluable way to get deals done at crunch points in the crisis when liquidity almost dried up.
“One day in one of the (peripheral) benchmark government bonds you could do a 100 million (euro deal) without too much trouble and then the next day 20 million would be as much as you could do without moving the market,” said Nick Robinson, head of fixed-income trading at Schroders, a global asset management firm.
Fear index
The importance of the bond market and its traders has grown as gyrations in government debt trigger huge swings in other asset classes and spill well beyond the euro zone borders.
In March, when the ECB poured a trillion euros of long-term loans into banks to tackle the crisis, the Australian and New Zealand dollars rose. And when political deadlock in Greece looked like ending in a chaotic default, European stocks tumbled 2.6 per cent in one day.
Movements in bonds issued by troubled euro zone states have tracked the general mood of investors throughout the crisis.
“In moments of stress, Spanish and Italian bond yields have become the new fear index, it’s the best indicator you can get,” said David Thebault, head of quantitative sales trading at Global Equities in Paris.
Their elevated status has helped many bond traders keep their jobs while other desks cut back on numbers.
Fixed-income trading — the broad category that includes sovereign debt — has not escaped job cuts, but most of the government bond trading desks at big banks have survived intact. Some banks, such as Nomura, have even expanded.
Those who have led the industry into its new age are sure of one thing — bond traders must keep acquiring new skills.
“Maybe if you are just trading (German) Bunds you can churn out prices and trade the curve — but those days are numbered. That is the old dinosaur mentality,” said Norrey at JPMorgan.
“People either reinvent themselves, adapt to the new skill set, and embrace what is needed to do the job better for clients, or they don’t make any money.”
With companies, households and budget cuts depending on governments’ borrowing costs, moves in bond yields have taken on global importance, forcing politicians and the public to become familiar with the bond market vocabulary.
“Finally after 20 years my mother understands what I do,” a bond trader at a second European bank told Reuters. — Reuters


Bill Gross: Get ready for an 'entirely different' market
Jacob Pramuk   | @jacobpramuk
12 Hours Ago
COMMENTSJoin the Discussion

Bill Gross has some bad news for investors.

In his June investment outlook released Thursday, the widely followed bond fund manager contended that bond and stock returns realized in the last 40 years are "a grey if not black swan event that cannot be repeated." Investors should not expect 7 percent returns on bonds or returns in the high single digits or double digits on stocks, Gross told CNBC on Thursday.

"The markets are entirely different and it would pay to travel to Mars as opposed to stay on Earth, because the returns here are very, very low," the manager of the Janus Capital Unconstrained Bond Fund, said on CNBC's "Power Lunch".

Bill Gross
Bill Gross
Gross said easy central bank policy could hold down bond returns. Central banks in Europe and Japan have adopted negative interest rates, while the U.S. Federal Reserve's target rate is at 0.25 to 0.50 percent.

German and Japanese 10-year bonds currently have negative yields, while their 30-year bonds yield less than 1 percent. The U.S. 10-year Treasury note yield sat around 1.8 percent Thursday.

An investor looks at screens showing stock market movements at a securities company in Beijing.
June is the worst month for markets: Fund manager
Gross contended those rate trends can hurt not only savers but also the broader economy. He said Fed policymakers, who have signaled they could hike rates at least once this year, realize they need to normalize policy.

"Ultimately, they have to move back up and I think a certain number of Fed governors realize that the normalization process is necessary in order to save business models and to save capitalism basically because capitalism doesn't work at 0 percent and it doesn't work at negative interest rates," he said.

Gross added that investors should "basically go the other way" by holding liquid cash. He said they should not buy corporate bonds and resist buying high-yield bonds or riskier stocks


不只瘋狗浪?外資:違約率跳增 債市恐遭海嘯吞噬
回應(0) 人氣(1840) 收藏(0) 2016/06/03 15:04
MoneyDJ新聞 2016-06-03 15:04:18 記者 郭妍希 報導
Business Insider報導,瑞銀信貸策略師Matthew Mish 2日發表研究報告指出,該證券的量化模型推估,未來12個月整體債市的違約率將從一年前的2.6%攀升至4.3%,有些人認為違約率攀高大概只是「瘋狗浪」、債市很快就會恢復平靜,但瑞銀的研究卻顯示,這僅是「海嘯的開端」、違約率恐怕長期看漲。

根據報告,今(2016)年第1季美國企業淨利年減了7.6%,償還債務的能力也跟著下滑。雖然企業可用新債償還舊債,但銀行現在核發貸款的標準趨嚴,以債養債愈來愈南。不僅如此,銀行的貸款利差(loan spread,即銀行貸款與放款的利差)開始拉大,也就是說,新債已經愈來愈昂貴。
ETF.com 6月2日報導,根據統計,投資人5月對美國掛牌的ETF僅投入21億美元,年初迄今的淨流入額累積只有490億美元、才約去(2015)年同期的一半左右(當時為840億美元)。
市場上的避險氣氛仍濃,黃金ETF在5月吸金30多億美元。其中,最受歡迎的是全球擁有最多實體黃金儲備量的ETF「SPDR Gold Trust (GLD)」,年初迄今已流入88億美元的資金。整體而言,原物料ETF年初迄今已進帳近120億美元,大多都是砸向黃金ETF。

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