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(EstateNewsWire.com, November 18, 2012 ) Cheshire, United Kingdom -- With competition reducing profits, the number of international banks trading bonds with government issuers will likely shrink as well.
That’s according to Robert stheeman, the UK’s Debt Management Office chief executive officer.
“There may be a need for some rationalization, and that may be painful,” Stheeman said. “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.”
Last weekend, UBS AG, Switzerland’s largest bank, announced it would abandon the majority of its fixed-income businesses to increase the profitability of its investment bank.
The move prompted fears that other banks may act similarly.
“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.”
According to data compiled by Bloomberg Industries, the world’s 10 biggest investment banks shared $22 billion of global fixed-income, currency, and commodities sales and trading revenue in the second quarter.
The DMO intends to sell the equivalent of $262.5 billion of gilts this year, although revised figures will be available beginning Dec. 5, said Stheeman.
The 10-year gilt rate dropped to a record low of 1.407% on July 23. Overall, UK government bonds have returned 3.2% this year, according to Bloomberg and the European Federation of Financial Analysts Societies.
“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.”
In an effort to support the gilts and stimulate growth, the Bank of England bought 375 billion pounds of the securities.
Yesterday, policy makers said they will temporarily halt the bond-purchase plan while leaving 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.”
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