Wall Street firms are starting to bet on an end to the profit-eroding boredom in credit markets by building their trading desks.
Nomura Holdings Inc. (8604) has added 10 to its U.S. corporate debt team this year, an increase of about 10%, and plans to expand further, according to Michael Guarnieri, the bank’s global head of credit products in New York. The latest hires are high-yield debt traders Daniel Frommer and James Incognito, who joined this month.
Debt trading hasn’t been what it was before the 2008 crisis from a profit point of view for two main reasons: New rules have reduced the wagers banks can make with their own money, and near record-low yields are eroding returns. But with interest rates forecast to finally go up sometime soon, it’s poised to become more lucrative.
“Volatility and the so-called tail risks always sneak up on you and are always something you don’t think is coming,” Guarnieri said today in a phone interview. “We’re not blind to the fact that volumes are low, but we are investing over the long term.”
Others are trying the same tack. Deutsche Bank AG (DBK) just raised $11 billion in capital in part to bolster its debt-trading business, after earlier this month announcing four new members for its credit unit. Guggenheim Securities LLC this year hired a corporate-debt team from Lazard Capital Markets.
When the Federal Reserve starts raising benchmark rates as soon as next year, corporate-bond yields figure to move higher with them. The current 3.6% average yield on corporate debt is about 2 percentage points below the norm over the past decade, according to Bank of America Merrill Lynch index data.
Here’s why more volatility may translate into bigger profits for banks: Investors will probably pull money from bond funds as prices fall, leading managers to sell securities to come up with the cash. In that scenario, brokers stand to earn bigger commissions because there’s usually greater risk — and potential reward — involved in an unstable market.