(Bloomberg) - Deutsche Bank AG is returning to trade credit-default swaps as it seeks to gain an edge over competitors in Europe and the U.S. in one of the hottest asset classes in credit markets.
The German lender is snapping up traders to focus on contracts that bet on defaults of individual companies in the high-yield space, six years after the bank axed staff and sold most of its positions in single-name credit swaps. That pullout came because post-crisis regulations required lenders to hold more capital.
Now there’s a broader industry move to flock back to swaps trading amid fears that central banks are sapping liquidity from the cash bond market. Credit derivatives indexes offering insurance on junk bonds are proving to be a more liquid exit point to unload positions in the event of a crunch.
“As one of the top originators in high yield we needed to be strong on offering clients liquidity in secondary markets,” Manav Gupta, Deutsche Bank’s head of European high-yield and investment-grade credit, said in an interview. “Market valuations are high, and volatility is low. Headline risk around tapering is in investors’ minds and seems very well flagged and so credit continues to feel good and investable.”
Deutsche Bank Chief Executive Office Christian Sewing has repeatedly highlighted he’s shifting his focus to revenue growth after a relentless cost-cutting drive over the past two years. The fixed-income division is a particularly important element of this strategy as it’s the company’s biggest revenue contributor and it has been growing much more strongly than Sewing expected when he laid out his initial plan in mid-2019.
Single-name CDS, and particularly indexes, are among the most heavily-traded assets in the credit market. Until the switch into the indexes’ latest series last Monday, almost 50 billion euros ($58 billion) of the investment-grade contracts had changed hands this month, plus a further 15 billion euros in the high-yield index, based on data by the Depository Trust and Clearing Corporation.
The move by Deutsche comes as part of a wider push back into credit trading and more specifically high-yield and sterling products. That’s led the bank to hire 24 traders over the last year on either side of the Atlantic. While some have been replacements, a number are new positions as it rebuilds its trading business. These include:
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In the U.S., Randy Harrison from BNP Paribas SA in macro trading, Mark DeSplinter from Citigroup Inc. to lead CDS trading, Matt Moore from JPMorgan Chase & Co. also in CDS, Mark Hebert from Wells Fargo in investment-grade bonds and Michael Lattarulo in high-grade financials.
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In Europe, it hired Sebastian Pearce from JPMorgan to run the high-yield trading unit and Dan McNally for euro investment-grade CDS.
While many firms are beginning to explore automation and algorithmic trading, Deutsche Bank said increased competition means it’s more important than ever for traders to do business face-to-face and to pick up the phone to win new business.
That means it won’t be following a similar trajectory to JPMorgan, which recently hired Andreas Koukorinis as its first-ever head of global credit e-trading amid plans to apply e-trading methods to high-yield bonds and credit default swap indexes.
The Machines
Deutsche Bank is looking to add resources to its algo trading business, but is being selective on where it will be applied. Such automated services don’t work well in parts of the market that require a more credit-intensive approach such as high yield, Gupta said.
“You can’t set up block trades without prior approval of a human trader, it requires more focus,” he added.
The bank is also looking to build up its portfolio trading, a way of pricing large baskets of bonds in one go. This type of transaction has boomed in recent years as traders have struggled to move individual positions in a market that counts thousands of different bonds.
In a sign of the sector’s explosive growth, cumulative transactions cleared by Tradeweb Markets Inc.’s electronic platform more than tripled within a year, surging to almost $390 billion in August, based on data provided by the company.
Still, Gupta doesn’t expect this to become the default trade type across credit.
“Portfolio trading has taken off in cash markets because it eases execution for clients,” said Gupta. In credit-default swap indexes and single-name contracts, “there is no real perceived benefit.”
(Updates with comments of Sewing’s revenue growth initiatives in fifth paragraph)
By Laura Benitez and Tasos Vossos
