ANZ’s head of markets Shayne Collins says his unit is navigating one of the biggest bond sell-offs in a generation and focusing on serving the bank’s customers rather than delivering big trading profits.
Mr Collins told The Australian Financial Review on the sidelines of the bank’s 12th annual debt conference last week the environment was “challenging at times” for trading desks, as market interest rates gapped and whipsawed violently.
“There are not too many people around in the business like me that were actually trading in 1994, which was the real, bona fide bear market,” he said. “Some of the traders weren’t even born yet – so I think there’s an adjustment around it.”
Shayne Collins, ANZ head of markets in Sydney on June 24. “Some of the hedge funds and market makers have stepped back.” Dom Lorrimer
The past two years, when interest rates fell and credit spreads narrowed, played into the hands of trading desks as the value of all fixed income assets they held went up, Mr Collins said. But now, bond rates have swung on the back of higher inflation prints in Australia and New Zealand, while the unwinding of the Reserve Bank’s yield curve control policy blew up some big offshore traders.
“There’s a kind of good volatility and there’s bad volatility,” Mr Collins said. “When you’re trying to act as a market maker to service your customer at times when liquidity is not as plentiful as it normally would be, you do have a bit of gap risk.”
The “gap risk”, he said, had led to the retreat of some market markers and was noted during last November’s episode when the Reserve Bank ended its yield curve control, or yield curve target peg. “Some of those hedge funds and market makers have stepped back. I think that’s impacted [the market].”
In conversations with bank equity analysts, Mr Collins said he has stressed ANZ’s markets unit is “not a proprietary trading” business but has, over the past six years, been supporting the broader bank. “The real key in these markets is to remain relevant to the franchise and the same time managing risk,” he said.
ANZ, by virtue of its large regional presence, has the largest market division of the big four banks. The annual income contribution from the markets unit should be either side of $2 billion, over depending on the prevailing market conditions, he said.
For the last half-year period, ANZ markets delivered $812 million of income. But this was almost twice as large in the bumper second-half of 2020, when it topped $1.5 billion.
About two-thirds of the revenue is derived from facilitating trades and transactions for corporate and institutional customers and one-third from managing the bank’s balance sheet of market securities.
Mr Collins’ comments came as ANZ concluded its annual debt capital markets’ conference, which was attended by 200 corporate and financial issuers of debt and institutional investors.
The bank is forecasting more than $53 billion of bond sales in the Australian market by financial institutions and corporates this year, as local banks prepared to wean themselves of the Reserve Bank’s Term Funding Facility.
So far, there’s already been $41 billon of bond sales, versus $28 billion at this stage last year, providing plenty of activity for debt capital markets bankers.
The major banks have sold about $24 billion of bonds into the domestic market, of which $20 billion is in the form of senior unsecured bond sales. The pickup in supply and the increased volatility in markets has, however, led to a widening in borrowing costs for the big four banks.
A five-year major bank bond had traded at 0.65 percentage points over the swap rate (currently 4 per cent) but that has increased to about 1.05 per cent. If a so-called new issuance premium to entice buyers into a new offering is added, that increases the margin to about 1.15 per cent over the swap rate.
Mr Collins says those margins are about the 10-year average, suggesting the bank bond market was “more normalised.” But industrial corporate issuance has fallen sharply from 2021’s record year.
So far, there have only been about $3.4 billion of corporate bond sales in the Australian market, compared to $10 billion at this stage last year. “Bank funding is typically cheaper at this point than bonds, so that’s an alternative form of financing.”
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