These should be good times for Wall Street bond departments. Central banks are pumping unprecedented amounts of money into the financial system to keep borrowing rates low and boost economic growth.
Bloomberg Businessweek reports that to capitalise on the low rates, corporations have issued $18.2tril of bonds worldwide since 2008, bringing the total outstanding to $9.6tril.
Speculative-grade offerings have surged this year to a record $518.9bn globally. Banks earn about three times more for buying and selling junk bonds than investment-grade debt.
Instead of raking in record revenue, Wall Street banks are jettisoning bond holdings and shrinking credit teams as they seek to comply with rules issued by the Basel Committee on Banking Supervision and the Dodd-Frank reforms passed by Congress in 2010.
To meet capital standards, lenders will need to reduce assets - measured according to the level of risk each carries - by at least 25% and cut compensation pools for fixed-income, currencies, and commodities departments by more than 20%, according to estimates by Sanford C. Bernstein. 'Rules and regulations are killing this business,' says Michael Maloney, president of headhunting firm Maloney. 'The new Dodd-Frank rules and regulations and everything that’s happening in the industry are forcing banks to readdress compensation and risk profiles'.
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