The number of banks that trade bonds directly with government issuers around the world will probably shrink as competition lowers profits, said Robert Stheeman, chief executive officer of the U.K.’s Debt Management Office.
“There may be a need for some rationalization, and that may be painful,” Stheeman said in a telephone interview on Nov. 6. “There are some people who argue that there is overcapacity in many markets and this is going to become a much bigger issue in the future.”
UBS AG, Switzerland’s biggest bank, said last week it will exit most of its fixed-income businesses to boost the profitability of its investment bank. The risk is that other banks may follow its retreat after the number of so-called primary dealers jumped in the past 10 years. Britain has 21 so-called gilt-edged market makers, up from 16 a decade ago.
“We’ve seen a significant increase in market makers and they are all competing for a slice of the same, albeit larger, cake,” Stheeman said. “All markets are likely to see some consolidation in the next few years.”
The 10 biggest investment banks shared $22 billion of global fixed-income, currency and commodities sales and trading revenue in the second quarter, according to data compiled by Bloomberg Industries. JPMorgan Chase & Co. ranked first, followed by Barclays Plc, Citigroup Inc. and Deutsche Bank AG.
The DMO plans to sell 164.4 billion pounds ($262.5 billion) of gilts this year. Revised figures will be released on Dec. 5, Stheeman said.
The 10-year gilt yield fell four basis points, or 0.04 percentage point, to 1.74 percent at 9:05 a.m. London time.
U.K. government bonds have returned 3.2 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. That compares with 2.7 percent for U.S. Treasuries and 4 percent for German bonds, as central banks kept interest rates at record lows amid Europe’s financial turmoil. The 10-year gilt rate reached a record low of 1.407 percent on July 23.
“If we are a safe haven it is because investors perceive there to be something positive about the U.K. story and about holding gilts as an investment,” Stheeman said. “We don’t develop any strategy that depends on those flows.”
The Bank of England has also provided support for the gilts, buying 375 billion pounds of the securities in a bid to revive growth. Policy makers said yesterday they will pause the bond-purchase plan and kept interest rates unchanged.
“The biggest single factor affecting yields is expectations around monetary policy,” Stheeman said. “Yields would be likely to be rising if the market felt that there was a likelihood of the BOE seeking to sell some of its holdings.”