Mint – Blain’s Morning Porridge
Curiously enough, the only thing that went through the mind of the bowl of petunias as it fell was: Oh no, not again...
It’s no wonder a number of accounts are wondering if this uncertainty warrants a defensive move into cash. More than a few bondholders are muttering about one-way liquidity and how tight the exits might get. The kinds of trades that made enormous sense if the era of low interest rates and QE infinity was established forever no longer look so appealing.
In terms of the new issue bond market, the full Ukrainian Chicken Farm Moment hasn’t happened, but the wobbles were a wake up. Deals priced cheap to sell are working...but the more speculative deals trying to squeeze out cheeky tight pricing are getting spanked.
I’m told not to panic. My in-house gurus say this will all sort its self out in a few weeks once the market gets behind central banks again.
I’m not so sure. For starters we have a close to call US election race on November 8, and the market fears it will throw up all kinds of instability. We’ve also got a clear distrust of monetary policy across the market – and that bodes ill for persuading markets the Emperor is not in the buff.
And just to remind us of the banking lottery, Wells Fargo’s plummet from the number one bank slot – replaced by JP Morgan – is a sorry tale. Not only rewarding employees for increasing revenues through dubious means, then sacking them – rather than their supervisors - when caught, and to cap it, a senior executive retiring with a US$124m pension pot. Pretty sordid, but a fine reminder of how vulnerable all the big banks are.
Meanwhile...why worry about today, when I can get you worried about the next 20 years or so? The Euromoney Electronic Trading seminar yesterday was fascinating; after giving a potted history of how fixed income markets have developed since 1963, my panel and I looked towards the future.
What will bond markets look like in ten to 20 years time? And how should investors be preparing now? I was wearing my futurologist hat – I’m expecting positive and radical change.
As this “Era of Investment Banking” draws to a quietus I have reached the following conclusions:
Investment bandwith will dramatically increase with new forms of project financing, small to medium-sized enterprises, infrastructure funding (including areas like aviation, shipping and energy), becoming core market sectors.
Alternatives are likely to see the most dramatic growth.
Change has been delayed by the consequences of the global financial crisis – probably meaning an even greater shakeout from conventional banking is still to come as markets continue to evolve, and new financial players emerge in both intermediary and services.
Power will transfer from banks to investors and issuers.
Intermediaries – to introduce and facilitate investor-issuer dialogue – will remain critically important.
Regulation, capital and too-big-to-fail rules will mean banks will continue to retreat from market activities. Their role as the transmission mechanism between borrowers and lenders will diminish – investors will increasingly become direct lenders. Many banks will revert to service and retail provision.
New technological approaches to debt will emerge. Distribution technology, such as the reverse auction system I described yesterday, may become standard, but also simpler ways to create broader bespoke and private funding will emerge.
Personally I doubt the corporate bond market will ever be entirely automated – if an investor decides they want particular risk, it’s not just a matter of buying that credit, although that might be achieved via a developed fixed income exchange-traded fund derivative.
Any large-ish corporate issuer may have deals with varied covenants, listings, law, degrees of subordination, security, call and even bail-in risk. There will be a role for simple trade matching, but the bulk of the smart money I speak to also wants ideas – which may range from the tactical decision on which particular bond to buy, to the strategic in terms of which particular sector or instrument class to exit. So I guess that means there will always be a role for someone who understands fixed income and the myriad possibilities around it…I hope…
Out of time..
Head of Capital Markets/Alternative Assets