Bottom Line: Glory days of fixed income are at an end

Tim Wallace
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BOND traders at banks have had it easy for decades – a rising market makes it pretty simple to make money.

On core instruments like US Treasuries, yields have been falling and prices rising steadily for years.

That came to an extreme in the financial crisis when terrified investors flooded into super-safe bonds instead of riskier assets.

Clearly yields cannot fall forever, and after a few years of negative real returns (where interest rates were below the rate of inflation), it was clear something would have to give.

Sure enough yields are creeping up. A year ago a 10-year US Treasury yielded about 1.7 per cent. Now it is at 2.6 per cent. The exact same is true with UK government gilts, and German bund yields are up from 1.25 per cent to 1.53 over the same period. The across-the-board rise is one factor crushing the fixed income desks’ revenues at the big investment banks.

Another is tough new regulations – analysts at Moody’s expect traders’ profits to be permanently squeezed by tighter leverage rules and restrictions like the Volcker rule that limit banks’ trading discretion.

Yesterday Citi reported revenues down 18 per cent in the unit, and on Friday JP Morgan said its fixed income trading revenues fell 21 per cent on the year. It is a gloomy start to the reporting season, and this trend will not end soon – rates in safe markets are on the way up for the next few years.

The time has come for traders to really earn their keep and find a new way to make money. Greek bonds, perhaps?

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