[LONDON] Banks are taking a hatchet to their bond-trading businesses and the biggest casualties are proving to be the people with the most experience.
About 70 per cent of credit traders cut in London last year at the 12 largest investment banks had worked in the financial industry for more than 10 years, according to data compiled by headhunters Michelangelo Search, which specializes in sales, trading and research roles. That's increasingly leaving trading desks manned by more junior colleagues.
Experienced, better-compensated staff are falling victim to banks' efforts to reduce costs as they try to generate profit within constraints imposed by regulators and central banks since the global financial crisis. There's more to come as banks from Bank of America Corp to Goldman Sachs Group Inc consider cuts as soon as this quarter.
"I've been in the fixed income business for 35 years but most of my cohort is now missing in action," said Tim Skeet, who has worked in bond-market roles since 1981, and is currently looking for a new position in the industry. "There's a 'juniorization' of the workplace underway in London as banks focus more on costs than revenues."
Banks are faced with a greater cost of trading as they try to meet regulatory requirements designed to make financial institutions safer plus the introduction of new technology that reduces the cost of deal making.
Critics say the absence of employees who've worked through a full credit cycle creates its own risk.
Banks once dominated credit markets, buying and selling debt securities to maintain large warehouses of notes to meet client requests. Now they're dumping their holdings and acting more like middlemen - connecting buyers and sellers - as they respond to rules designed to make them hold more capital or take less risk.
"The fixed income world is following the classic path of a maturing industry where it becomes more regulated, more automated, requires fewer people and margins decrease," said Carl James, global head of fixed income trading at Pictet Asset Management in Geneva, who landed his first job in finance in 1986.
Revenue from fixed-income, currencies and commodities trading, or FICC, was on track to drop to US$65 billion last year at the 10 largest global investment banks, according to data compiled by financial research firm Coalition Ltd as of Nov 26. That's the lowest since the financial crisis and less than half of what was earned in 2009.
About 60 credit traders and analysts were let go in the City last year, according to Michelangelo. Bank of America Corp chief operating officer Thomas Montag is increasing pressure on deputies to lower expenses across trading and investment banking, a move that will probably lead to job cuts in March, people with knowledge of the initiative said last month.
Goldman Sachs Group Inc will decide soon whether to cut more people working in fixed-income sales and trading beyond its annual five per cent cull, a person with knowledge of its deliberations said in January.
Barclays Plc plans to cut 1,200 jobs at the investment bank, exiting businesses and closing offices around the world in an effort to boost profitability, people familiar with the matter said in January.
Goldman Sachs spokesman Sebastian Howell, Barclays spokesman Jon Laycock and Victoria Garrod, a spokeswoman for Bank of America, declined to comment on the layoffs.
"When a bank cuts experienced people in size they're saying they're getting out of that business for good and don't see it ever coming back," said Christopher Wheeler, a banking analyst at Atlantic Equities, a US brokerage firm based in London.
"Fixed income was once a profit machine on Wall Street but the greater level of capital required and lower risk appetite from clients has wrought a secular decline."
The loss of experience on banks' trading desks couldn't come at a worse time for bond investors. Credit markets are grappling with a global selloff as commodity prices plunge and emerging markets slow, stoking investors' concerns about the state of the global economy. Weak bank earnings sparked a rout in financial debt securities this month.
The cost of insuring corporate bonds in Europe using credit-default swaps surged to the highest level since June 2013 last week, according to data compiled by Bloomberg using London closing prices.
As bank debt came under pressure, contracts on subordinated notes of banks and insurers rose to the highest in almost three years.
"A senior trader over the course of his career will build up a network among real money investors and hedge funds and will know whom to call when he needs to sell or source bonds," said Brett Chappell, Copenhagen-based head of fixed-income trading at Nordea Asset Management, who started out in finance in 1990.
"I have no qualms with the young guys, but an experienced trader knows how to deal in volatile markets and periods of rising interest rates."