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.