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As Europe’s Bond Market Dries Up, Traders Fear for Jobs

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Pity the European bond trader.

Once the master of a booming euro zone universe spanning Greece, Italy and Germany, he now presides over a shrunken, fear-struck bond market — and might well lose his job by the end of the year.

Panic that the default of a euro zone economy might lead to a crackup of the monetary union has turned European bonds, once freely traded and viewed as risk-free, into semi-poisonous hot potatoes that in some cases trade only by appointment.

The result has been a sharp drop-off in trading volume — the mother’s milk of bank profits — raising questions within capital-constrained banks in Europe about how much longer they will stick with their overstaffed bond divisions.

They may number only about a thousand here in Europe’s bond trading hub, but these highly paid traders, sales people and derivatives wizards have in many ways been at the vanguard of the boom and bust of the European debt bubble. Now that bubble risks pushing the euro zone into a second recession at the cost of millions of public and private sector jobs.

When money was cheap, bond traders facilitated the borrowing excesses of Greece, Italy and others — but once these debts came into question, they have been among the first to sell, and they continue to do so.

As Europe’s leaders prepare to gather in Brussels on Friday to chart a course to closer political union, the bond purveyors are again attracting scrutiny — only this time it is from their cost-conscious employers.

The numbers tell much of the tale.

During an earlier era when Greece could borrow money at nearly the same interest rate as Germany, Greek government bonds traded at the rate of as much as 60 billion euros a month. Through the first two weeks of September, just 1 million euros in Greek bonds exchanged hands on HDAT, the main platform for trading Greek bonds.

With Greece on the verge of default, such a result is hardly surprising. But as the fears of a euro zone collapse have spread in recent weeks, volumes have dried up for larger markets as well.

Italy, one of the deepest, most sophisticated bond markets in the world, reported that secondary market bond trading on its main MTS platform withered to 887 million euros on Nov. 24, from 5.9 billion euros on Jan. 7, 2010.

“This is an illiquid market that is really depressed — there is just no appetite for position-taking right now,” said Don Smith, an economist at ICAP in London, a leading broker-dealer that facilitates trades between large institutions. It is hard for bond traders, he added: “You are there to make a market and instead you just sit there.”

Konstantinos Panayides, who was responsible for trading Greek bonds at Barclays Capital until he was let go this summer, knows the feeling.

“It was dead,” he said. “There were no prices and no one was taking positions,” not just for Greek bonds, but for Italian bonds as well, he recalled. He described an atmosphere of near panic as foreign investors unloaded their bonds to the big banks, which then had to find some way to move these deteriorating assets off their books.

Despite his reduced circumstances, Mr. Panayides, who is 31 and from Cyprus, does his best to keep up his bond trader’s swagger. He has no plans to return to a big bank, but is enthusiastic about a move to a small brokerage house where he will focus on distressed securities.

“You never give up,” he said, sipping a coffee in a cafe near his home in central London.

But there is no getting around it, he said. With banks reducing their balance sheets aggressively and risk appetite diminished, the environment is going to get worse before it gets better.

“A lot of people are going to get laid off,” he said.

Perhaps surprisingly, there have not yet been any mass layoffs in the euro government bond sector, which as early as 2009 was one of the main profit drivers for the large European banks.

That is largely because these areas have been profitable in the past, with top banks like Barclays Capital bringing in revenue of about 1 billion euros in a very good year. And unlike more risky pursuits like proprietary trading or structured products, bond trading does not require a significant outlay of capital.

But the process of reducing staff may be beginning.

Earlier this month, Credit Suisse laid off Stanislas de Caumont, the head of the bank’s European government bond operations, along with eight traders and sales people who were either directly or indirectly involved in the business of selling and trading European bonds. The cuts represent about a 20 percent reduction in the bank’s euro bond staffing.

And BNP Paribas, which has one of the largest euro bond trading operations on the street, has recently begun to tell some of its traders in this area that they are “at risk,” or that their jobs will be gone in a month or so unless market conditions improve substantially.

For now, most large European investment banks here are putting up a brave face. They say that even with the sharp reduction in trading volumes and the growing reluctance of tried and true investors — including pension funds, insurance companies and the banks themselves — to invest in these securities, they have no plans to lay off traders and sales people.

But some, like Credit Suisse, are facing the prospect that the glory days of government bond trading in the euro zone may not soon return.

“We continue to be proactive about monitoring the size of our business relative to client opportunities and market conditions,” said Adam Bradbery, a spokesman for the bank. “This involves realigning resources to growth areas and adjusting capacity to meet client needs and to manage costs across the business.”

The expected pullback echoes the cutbacks globally in investment banking this year as revenue dwindled from trading stocks, bonds, currencies and commodities at banks from Goldman Sachs to HSBC to Citigroup , which announced on Tuesdaythat it would shrink its overall headcount by 4,500 jobs, or about 2 percent.

Trading government bonds is a high-volume, low-margin enterprise, which is why the leading banks like Deutsche Bank and Barclays Capital are not yet giving up on the business. For banks that rank lower in their ability to attract large volumes, like Credit Suisse, it makes more sense to pare back.

The best traders can still make a profit by nimbly taking on and selling off bond positions. But with the growing political uncertainty and the ambiguous role of the European Central Bank, combined with trading that is both thin and volatile, making serious money has never been harder, traders say.

The coordinated intervention by central banks last week offered a brief trading respite, but market participants said they expected that as long as doubts persisted about the finances of Italy, France and Spain, the large banks would remain very cautious about trading and holding the bonds of those countries.

“The banks’ ability to take positions in these countries has declined substantially,” said Jac Kragt, the chief finance and risk officer of PGGM, a large Dutch pension fund that manages 109 billion euros in assets and has been an aggressive seller of Italian and Greek bonds. “The market has changed — it has become a lot less liquid.”

It is a sharp reversal for a market that in 2009 was singled out by the big banks as a major area of expansion, in light of the more than a trillion euros in bonds that governments like Italy, Spain and others were expected to issue.

Big banks like Barclays Capital, Deutsche Bank and BNP Paribas were the leaders, but smaller institutions like Scotiabank, Daiwa and Jefferies joined the fray as well.

A large desk now would include about 15 traders and bankers, some to buy and sell bonds and others to structure more profitable derivatives, like interest rate swaps. Add 20 or so sales people, and the result is one of the more populous clusters on a big bank’s trading floor.

In the days before the credit squeeze — and especially in 2009 — volume and profit soared. Analysts and headhunters said that some of the top bond traders could pull in bonuses of £5 million to £10 million (about $7.5 million to $15 million) for the year with more junior executive taking in amounts from $600,000 to several million dollars.

This year, with bond revenue down sharply, traders will be lucky to keep their jobs, to say nothing of getting any bonus.

“November has been a very difficult month and one expects things to get worse,” said Christian Robbins, a headhunter who specializes in this area at Nicholas Scott. “We will see additional redundancies in the coming months if volumes do not improve.”