Banks around the world have been cutting jobs and selling units as they struggle to adapt to new requirements imposed after the 2008 financial crisis. The $11.3 trillion U.S. government bond market offers some sanctuary. Regulators assign zero credit risk to Treasuries, and trading in the bonds is exempt from the so-called Volcker rule, which prohibits banks from making proprietary trades on their own behalf.
Financial Ecosystem
The desks that trade Treasuries still need capital to guard against potential losses from market movements or operational mistakes. That adds to a bank’s risk-weighted assets, or RWA, increasing the capital required, BlackRock’s Prager said.
“Even something that sounds benign like a Treasury market- making operation actually has much more RWA than is obvious at first glance,” Prager said. “We’re all in this big financial- services ecosystem, and everyone’s choosing what activities they want to be excellent in and what activities they want to exit.”
Credit Suisse Group AG, the second-biggest Swiss lender, eliminated about eight jobs on its U.S. government-bond trading desk last month, including the former head of the group, Jim O’Brien, according to a person with knowledge of the matter. While some traders at competing primary dealers said the cuts reflected pressures on Swiss-regulated firms, others said it was a sign of the reduced return on capital from the Treasury desk.
Banks and broker-dealers don’t report how much profit they make from trading Treasuries, let alone from auctions, instead lumping those gains into a category called rates that encompasses all government bonds and related derivatives.
Tight Ranges
“The markets are, because of the tight ranges, very quiet,” said John Fath, a former head Treasury trader at Zurich-based UBS who’s now a principal at investment firm BTG Pactual in New York, which manages $2.5 billion. “Then to add insult to injury you have direct bidding going on in the Treasury, where that’s at least one part of the market where you’re able to make a little money, and now that’s not even giving you an edge.”
The yield on 10-year Treasury notes has remained between 1.58 percent and 2.06 percent over the past six months, a narrow range for traders trying to book profits on price swings. That’s also made it difficult for banks trying to justify the cost of employing 30 traders in a primary dealership, Fath said.
“The primary dealers are kind of in a bind here in the sense that they’re being required to buy securities from the Fed, but they’re doing so with a lot less information than they’ve had in the past,” said Bitsberger of BNP Paribas. “Maybe the Fed needs to look at primary dealers differently and not necessarily require them to bid in all auctions.”