Reuters: Bankruptcy News: COMMENT: Will bond traders finally get a summer break?

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COMMENT: Will bond traders finally get a summer break? Jul 23rd 2013, 13:03 By Christopher Whittall Tue Jul 23, 2013 9:03am EDT LONDON, July 23 (IFR) - There was a time when fixed-income traders looked forward to summer. In Europe at least, tradition dictated that the arrival of August brought with it a month-long hiatus in capital markets that could be happily spent on the beach. With London enjoying the most prolonged period of sunshine in many years, many of the city's bankers will be hoping for a return to these balmy days, if only because it would make for a welcome change. For the past six years, August has been synonymous with disaster for trading desks. It was on the ninth day of this month in 2007 that BNP Paribas gated three of its money market funds due to difficulties over valuation of subprime mortgage assets - generally accepted as the canary in the coalmine for the financial crisis. The following year saw the financial system teetering on the brink of collapse, leading to the bankruptcy of Lehman Brothers in mid-September. 2009 bucked the trend as markets rebounded sharply, fuelled by a glut of cheap central bank money, but this heady era of asset price reflation was brought back to earth with a bang in summer 2010, as fears over a sovereign debt crisis emerged in Europe. By August 2011, inaction from European policymakers resulted in Italy and Spain getting sucked into the vortex. Peripheral bond yields rocketed, funds were pulled out of European banks and credit markets duly went haywire. Greece shaving EUR100bn of its debt in the largest sovereign restructuring in history in March 2012 was not enough to stop the rot. Spanish 10-year bond yields hit a new high of 7.6% in July that year, and markets were in for yet another bumpy August. This volatility was only truly arrested when ECB president Mario Draghi pledged to do "whatever it takes" to keep the currency union together. TRADING ON FUMES In each case, traders reckon the volatility was compounded by the timing of events. Volumes naturally decline during the holiday season and the market trades on fumes, exaggerating any price swings. Add to this the fact that heads of trading desks are more likely to be sitting by a pool than in front of a Bloomberg terminal, leaving inexperienced pups to hold the fort, and you have a recipe for a severe bout of volatility. So, returning to the present day, has much changed? Certainly, Draghi's comments seem to have effectively neutered tail risk in Europe. Indecisive Italian elections and a botched Cypriot bailout earlier this year failed to spark the re-emergence of the eurozone crisis proper. Portugal's political woes threatened to derail things more recently, but markets seem to have given the country the benefit of the doubt so far, with 10-year government bond yields dipping below 6.5% again from 7.5% earlier this month. The sudden sell-off following fears that the US Fed would begin scaling back its quantitative easing bond-buying programme in May is perhaps the nearest the market has come to the pre-Draghi days. But things have been steadily stabilising over the past few weeks, with the iTraxx Main index tightening back to below 100bp - levels last seen in late May. Societe Generale's credit strategist Suki Mann reckons "we can finally get ready to down tools for the summer. And rest up easy through it". "After what can now be described as an overreaction in fixed income markets from late May through June to those tapering concerns, the market has found some firmer ground from which to regain its poise," he wrote in a note yesterday, co-authored with fellow strategist Juan Valencia. With volatility gradually declining, traders may finally be able to rest easy this summer break, although few are counting their chickens just yet. "The last few summers have always been a pain in the arse for everyone, so I'd hate to predict that this one is going to be quiet," one veteran trader told IFR. "Germany's elections in September could be noisy for Europe; the situation is still unstable. So I'd like to think it's going to be quiet, but I'm not so sure." (Reporting By Christopher Whittall) Link this Share this Digg this Email Reprints

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