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.
Credit’s not a bad place for securities firms to hire in the meantime, anyway, because traders give a boost to teams of investment bankers trying to nab bond offerings. Banks need to maintain groups of traders and salespeople if they want to win lucrative assignments shepherding company debt into the hands of insatiable investors.
Underwriting corporate debt has been one of the bright spots on Wall Street, with firms earning about $10.6 billion to underwrite $1.5 trillion of the notes last year, according to data compiled by Bloomberg. That’s up from $7.6 billion in 2011.
Nomura’s latest hires include Frommer, who joins as a managing director in high-yield trading and is formerly of UBS AG. (UBSN) He was registered at the Japanese bank as of May 12, Financial Industry Regulatory Authority records show. Incognito, a speculative-grade loan trader, began at Nomura as of May 19 after joining from BNP Paribas SA, according to the Finra records.
Credit trading may have lost some of its luster for the world’s biggest banks, but Wall Street is betting a bigger payday isn’t far away.
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