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Refinement for raw materials

Commodities are on a roll as equities stumble and bonds reach their peak. But can commodity-based investments offer value for the long term as well as offering temporary relief to embattled portfolios?

INVESTMENT BANK TRADING floors are becoming divided territories. On one side are equity sales, trading and research staff who, quietly wondering why they bother coming to work to grapple with deteriorating markets, try to salvage some of their clients' portfolios and keep a slice of their bonuses.

On the other side you have debt teams, which have thrived recently on risk aversion, interest rate cuts and a search for yield that has also tightened credit spreads in many high-grade and high-yield sectors. Their fear is that this can't last and that the bond market bubble will burst with a bang just as equities did in 2001.

In the middle, you have commodities teams. Trading volumes are increasing, headcount is rising, and new projects are emerging as quickly as the boffins can dream them up. Suddenly it is sexier to trade soya beans than equities or bonds.

"Banks are investing in their commodities operations because they know that the client business is out there," says Jean-Marc Bonnefous, global head of commodity derivatives at BNP Paribas in New York.

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