‘Bond Trading’ Exodus Reveals The Global Economy’s Landmine

Monday, April 8, 2019
By Paul Martin

by Jeffrey Snider via Alhambra Investment Partners,
Mon, 04/08/2019

It isn’t just US or European banks which are shrinking. The nature of this post-August 9, 2007, world is just that – global. Sure, there are regulations which have made investment banking more expensive. But there isn’t a rule or law that Wall Street (really Lombard Street) wouldn’t “discover” a way to circumvent it if they all thought it was worth the trouble.

Bond trading, a euphemism for all this FICC money dealing stuff, didn’t need an LCR to look at the world differently. It only needed Bear Stearns.

There is only risk where there used to be only return. In an environment where everyone largely agrees (outside of a few outliers) with this returnless risk scenario there really is no other course. Being on the wrong end of such asymmetry leaves only the one long run option. You can fight it and disagree now and again, but that sort of reflationary thinking just cannot last.

Goldman Sachs earlier this year announced that it would be cutting back. This week, it was Nomura in Japan (thanks J. Fraser). Once that country’s biggest stalwart in “fixed income”, another way of saying bond trading, they don’t want to do it anymore, either.

The biggest question mark hovers over the cuts in fixed-income trading, often seen as a strength at the bank. Nomura is scaling back emerging markets and G-10 rates, foreign exchange and flow-credit trading businesses, as well as costs in the EMEA flow business by 50 percent. Flow trading occurs on behalf of clients, unlike proprietary trading.

The business just isn’t there for them to keep up with capacity. Why isn’t the business there? An unstable system destroys not just opportunity but also the incentives to try and stabilize the system. At this point, nothing other than outside influence will break the cycle (and that’s about as likely as a central banker recovery prediction paying off).

The Office of the Comptroller of the Currency (OCC) data on Q4 2018 was pretty damning as far as the domestic dealers are concerned. Goldman had an atrocious quarter, no surprise, almost certainly betting on Jay Powell. Money dealers are described in the Economics (and central bank) textbook running neutral books; they don’t, they never have.

The Rest…HERE

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