Bond Trading Poll: International bonds
Bond Trading Poll: Government bonds
Bond Trading Poll: Methodology
Deutsche Bank has marched to the top of this year’s polls for trading international bonds, rising from second position last year. It owes its top spot to dominance in most of the new euro-market categories.
Following the advent of the euro we have added new classifications to our annual poll. This year there are categories for straight bonds, floating-rate notes and convertibles in the euro market, as well as categories for different maturity buckets. This reflects how many firms have abandoned their old country-based trading desks and have increasingly organized themselves around short-dated, intermediate and long-term bond traders, with separate traders for government and credit bonds.
Deutsche Bank rose from 15th to sixth in trading straight dollar bonds and from 12th to fifth place in dollar FRNs, but won its overall top spot by leading trading of euro FRNs and straights, and also ranked top in various categories of credit bonds, including corporate, bank and Pfandbrief.
Hub and spokes
So what has Deutsche done to improve its showing so much? Three to four years ago the firm implemented a strategy to consolidate disjointed regional and country operations into a cohesive structure, while still maintaining a strong presence on the ground. Saman Majd, global head of OTC derivatives and government trading at Deutsche Bank, describes a hub-and-spoke strategy, of Frankfurt and London as the twin centres of gravity but with deep local penetration.
Majd explains: “With the advent of the euro, we have centralized our [euro] trading and risk management in Frankfurt, without sacrificing our domestic trading presence in any of the key European local markets.” Trading is organized on a sector approach and across maturity brackets, to offer a pan-European focus.
Wolfgang Matis, head of fixed income, Europe, at Deutsche Bank adds: “Our decentralized approach in European governments gives us a strong competitive advantage by allowing us to aggregate risk across individual markets rather than treating individual country risk as an homogenous product.”
Is Deutsche’s the only recipe for success or is it too early to say? Traders face a testing time. In the words of Michael Weston, head of debt capital markets, Europe, at Morgan Stanley Dean Witter: “This is a crucial year for those hoping to be categorized as bulge-bracket firms in Europe, and the single currency and bank consolidation will only accelerate this process.”
The euro Eurobond market has made a strong start, being very active in new issues and secondary market turnover, says Ian Baillie, head of Eurobond trading at Salomon Smith Barney. The firm was ranked seventh overall in international bonds, compared with 17th last year for SSB and 31st for Citibank.
Although the euro government bond market is probably more liquid than the sum of the previous national markets, the pace of activity has been a little disappointing. “Cross-border flows since January 4 have not been as significant as expected,” says Zoeb Sachee, head of European government bond trading at Salomon Smith Barney, which shared sixth place in the overall government bond rankings. Sachee explains that many bond investors are not transforming their existing domestic portfolios into pan-Europe quickly, but are only putting new money into euro portfolios.
Other traders share this disappointment. One says: “We thought flows from Asia and the US would be bigger, but the first three months of the currency were slightly worrying. Asset-allocation into the euro will increase.”
For all this, the markets have changed, and “it is the pace of the move from essentially local markets to one big market” that has surprised Sachee at SSB. “Salomon Smith Barney was not seen as a major player in, for example, the Belgian franc government market pre-Emu,” he says. “Since January 4, SSB is increasingly regarded as a major euro government player in all countries, including Belgium.”
The US firms hope to have an advantage if the European markets increasingly come to resemble the American model. Tom Juterbock, head of European and American government bond trading at Morgan Stanley Dean Witter, sees the development of larger, more liquid European corporate and government markets driven by new trading strategies. These, he says, will require greater capital, with government bonds used increasingly as a hedging vehicle in the growing corporate-bond markets. This “will fit our risk-taking profile,” he says.
But outright comparisons with the US government bond market are premature. Lau Veldink, head of fixed income at ING Barings/BBL points out: “The big difference is that in the US government bond market there is only one issuer and there are up to 10 different sovereign issuers in the euro market.” Despite the removal of currency risk, investors still differentiate between French and Italian government debt on the basis of debt-to-GDP ratios and other factors.
Country desks disappear
Salomon Smith Barney changed from a country to a maturity focus 15 months before the euro was introduced. “Analysis by maturity allows for greater flexibility of pricing along the yield curve and ultimately adds another set of dimensions to hedging capability,” explains Sachee. Deutsche Bank’s Matis notes that the speed with which the markets have converged has led to a new style of trading. “Our relative-value trading approach allows us to accommodate extremely large customer flows across the euro yield curve without local market disruption.”
At Warburg Dillon Read government bond trading is centralized, but this is in order to centralize risk, not a result of the euro says Simon Bunce, managing director, interest rates, at Warburg Dillon Read. “Government bond trading at Warburg is centralized to concentrate all flows into one book and optimize risk management,” he says. “Local sales teams can be helpful in servicing a broad client base. But a regional trading presence is a relic from formerly domestic focused markets and does not add value in a single-currency environment.”
RBC Dominion Securities, which came eighth in the overall international bond rankings, is keeping a low profile and “letting the big firms slug it out,” says Adrian Bell, global co-head of fixed income. “We do not want to compete head on,” says Bell, “but have opted to build a euro trading platform over time to offer euro spread product to clients.” The firm ranked 25th overall in 1998 but boosted its position by absorbing Hambros, a specialist trader in some smaller bond sectors. RBC Dominion enjoys success in a large number of specialist niches, such as the rand and Canadian dollar.
That strategy contrasts markedly with Deutsche Bank’s global ambition. Majd says: “Our global strategy has been to build our presence in the US and Asia to complement our European strength. This allows us to provide our clients with broad access to fixed-income markets around the globe.”
The ability to offer a full suite of services from origination to secondary trading also sets the biggest players apart. Primary-market activity provides a significant pipeline for business. Although no firm is a dominant one-stop global bond shop, the ability to offer investor clients significant allocations of desirable new issues is crucial. “Regional banks are unable to offer the full range of capital-markets products, so this will lead to greater demarcation between universal retail banks and international investment banks”, says Manfred Schepers, global head of debt capital markets at Warburg Dillon Read. “Those that cannot operate across all areas will be left to boutique markets”.
Technology is driving costs down, enabling greater consolidation and changing the way the markets operate. EuroMTS, a new system for trading euro-denominated European benchmark government bonds electronically, has been well received after its launch in March (see page 10). The pace of adoption of electronic trading is accelerating and seen as the key to improving liquidity and transparency. At Deutsche Bank the so-called autobahn system enables wholesale customers to execute trades electronically at a live price that is constantly updated throughout the day.
Discovery Brokerage, Morgan Stanley Dean Witter’s online brokerage service, offers round-the-clock trading of US government bonds. Trade volumes of over $100 million have been carried out since the site’s launch in April 1998, and over 40% of these transactions are carried out “after-hours”. Morgan Stanley Dean Witter’s Juterbock says his is “the only firm with both an internet broker and a large product profile, and we plan to develop a European internet broker capability”.
It is too early to say whether American techniques will override European traditions. But size certainly seems to matter. The challenge for trading firms is to keep their teams together, embrace the right technology, maintaining access to capital and prove their distribution. But there is more than one business plan for bond trading firms to follow.
