European Fixed Income: Volatility, Uncertainty and Shifting Economics
Europe’s fixed income markets appear on the brink of historic change. Increased capital reserve requirements are reducing dealer margins on fixed income trading while a sovereign debt crisis is triggering sell-side losses in traditionally reliable business lines and introducing crisis-level volatility to trading markets.
The results of Greenwich Associates 2011 European Fixed Income Investors Study reveal that this combination of cyclical and secular pressures is causing major European and global financial service organisations to rethink their approaches to European fixed income. “Following the announcement by some dealers that they plan to reduce the risk-weighted assets for their fixed income business, as well as their commitment to more capital-intensive product areas such as securitised products, we would not be surprised if others were to follow their lead,” said Greenwich Associates consultant Andrew Awad.
Abandoning Market Share Strategies, Dealers Target Profitability
Already, the market has seen a more measured pullback on the part of some of Europe’s largest dealers, which are abandoning strategies based on amassing market share in the face of long-term increases in their own costs of capital. Most obvious has been the reductions in dealer-provided liquidity in rates products, which account for roughly 75% of European fixed income trading volume, but produce a much lower 25% of dealers’ customer-related revenues, the majority of which are generated in credit products.
An increased emphasis on profitability on the part of these large dealers over the past 12 months contributed to a reduction in aggregate market share among Europe’s three leading fixed income leaders. “To date, most of the market share lost or ceded by a few of Europe’s top dealers has been reallocated to other large, pan-European and global dealers with the wherewithal to provide consistent liquidity and coverage,” said Greenwich Associates consultant Frank Feenstra. “As a result, what we’ve seen to date can best be described as a reshuffling of market share among large dealers. However, at a time of so much volatility and uncertainty about future market structure, we are on watch for potentially more dramatic changes in the year ahead.”
Reflecting these changes, the results of the Greenwich Associates 2011 European Fixed Income Investors Study reveal that Barclays Capital maintained its position atop this market in terms of market share in overall institutional trading volume, followed by Deutsche Bank and JP Morgan. After making significant gains in both footprint and market share over the past year, Morgan Stanley joined BNP Paribas in a tie for the fourth spot.