LONDON — James Konrad, a bookish 27-year-old with a polite manner, used to make a living at a sports betting company, weighing the odds of muddy terrain affecting the sure-footedness of racehorses.
These days, he takes bets on the muddy terrain that is European politics.
Mr. Konrad trades up to £3 billion, or $4.7 billion, worth of euro zone bonds a day for Royal Bank of Scotland. The bets are just as uncertain in both fields, but the sums are vastly larger in his current job, amounts that seem to stagger even him.
“How do you make someone understand that you’ve traded a billion worth in bonds?” Mr. Konrad said. “A billion. It’s easy to get lost in the zeros.”
The bond market has emerged as a mighty protagonist in Europe’s economic crisis, representing a seminal shift in power from politicians to investors and a relatively obscure cohort of bankers.
Their collective day-to-day judgment can now topple governments and hold the key to the survival of the euro.
If that market seems an unfathomable Goliath to outsiders, in interviews bond traders themselves confessed to being fearful and confused.
They now juggle astonishing levels of risk and wealth for investors — some 6.7 trillion euros, or $8.3 trillion, in euro zone government debt, according to the European Central Bank.
Fundamental economic concerns that some European countries have too much debt is a major factor driving the market.
Many investors are worried about the medium and long-term risk of holding European government debt, and have made what they consider the rational decision to reduce their holdings or even bail out.
And while European leaders maintain that the common euro currency will survive the crisis, not all economists are so sure.
Some traders worry openly that too many of their colleagues lack the skills to decipher conflicting signals from Europe’s leaders in an industry ever more dependent on perception and political guesswork.
The short-term fluctuations of bond rates, they concede, are not always an accurate reflection of value and risk. Yet traders are being taken as the last word by politicians on any range of government policies — and are often misinterpreted, they said.
“We used to be able to measure everything to the nth degree,” said Tim Skeet, managing director of fixed income at the Royal Bank of Scotland.
“These days, nothing is measurable. This has become less about number-crunching and more about the oracle of Delphi.”
Economists tend to treat the bond market as a rational player imposing budget discipline on politicians. Politicians portray it as having the conscience of a mob, accusing “bond vigilantes” of undermining Europe’s recovery and its cherished welfare state.
The reality is more nuanced. That fear among traders and their jittery investors helps explain why rates have surged for troubled countries like Italy and Spain, and why interest rates have hovered near negative territory for more trusted German bonds: so terrified are investors that they are effectively paying Berlin for the privilege of lending it money.
But in risk, there is also profit — lots of it — as well as loss. The amounts now at the command of the bond market have made it vulnerable to the kinds of speculation, volatility and returns more associated with the stock market.
As government debt across the European Union has reached 88 percent of gross domestic product, and much higher in a number of countries, according to Eurostat, some sovereign debt funds have made investors annual returns of 9 percent.
Of course, investors who held Greek government bonds suffered steep losses when that country defaulted. With so much leverage at its disposal, the bond market’s judgments can have the power of prophecy — that is, they can be self-fulfilling, influencing events even as traders assess them from the trading floor.
If investors and traders judge Spanish bonds to be risky because Spain’s government may default, they help make it more likely that Spain will indeed default, by raising its borrowing costs.
“Whatever the Spanish government does — and it has done a lot — it doesn’t actually help much, because the market is pretty much convinced a full-fledged bailout is required,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy, a consulting firm in London that specializes in sovereign credit risk.
It has not helped, of course, that for months the Spanish government denied or misrepresented the depths of its banking problems.
Nor that before Spain ran into trouble, Greece had already defaulted on its debts. And given Spain’s deep economic problems, some believe that a bailout may be needed.If politicians expected the bond market to speak with one voice, traders commonly complained, it would help if politicians did, too.
Olivier de Larouzière remembers calling a crisis meeting in the Left Bank offices of Natixis Asset Management in Paris during one watershed moment in June.
That day, Mr. de Larouzière, who as head of fixed-income euro securities at Natixis manages 18 billion euros worth of debt, watched as the yield on Spanish 10-year bonds climbed above 7 percent while Chancellor Angela Merkel of Germany and her European counterparts scrambled to persuade markets that a bailout for Spain would not be needed.
The yield, or interest rate, on a bond rises as its price falls. Both reflect the risk of the investment.
The rise in the rate meant that bonds Mr. de Larouzière had previously purchased were losing value. When the news ticker on Mr. de Larouzière’s screen announced that leaders had agreed in principle to lay the groundwork for the banking union that markets had been clamoring for, the yields eased back. But his relief did not last long.
“After the weekend, questions began circulating on the floor,” he recalled. “We suddenly realized that this would only really take effect in 2013.” Once stung, Mr. de Larouzière was left too wary to buy Spanish debt. He was not the only one.
A week after the summit meeting, rates were higher than on the eve of the talks. That kind of negative perception — prompted at least in part by legitimate concerns that European leaders do not agree about what to do — can be infectious, particularly when mixed with real economic data that has grown increasingly alarming.
These days Mr. de Larouzière says, “Italian bond yields should not be where they are,” meaning he thinks the country’s progress in making policy overhauls was better than it was being given credit for.
But he is still selling his Italian debt, fearing that collective pessimism will make it harder for Rome to raise the 100 billion euros it needs this year.
“This is less about economic fundamentals and more about fundamental human emotions — it’s about fear,” he said. Of course, skeptics would counter that for all the policy progress that Italy has made, its bond prices reflect worry that its debt level remains uncomfortably high.
Those concerns are new for most traders who came of age when much of Europe carried a triple-A credit rating. The picture has changed so quickly that Mr. Konrad, though not yet 30, has straddled the two eras.
On the Royal Bank of Scotland trading floor, Mr. Konrad sits behind a wall of real-time numbers: yields, futures and a spreadsheet with color-coded bond issues flicker across seven computer screens. But these days his history degree comes in handy.
To come up with the 600-plus price quotes a day he makes for his bonds — about one a minute — Mr. Konrad’s assessment of a country’s election results is in many ways as important as its G.D.P. report.
As someone who has studied German and French literature, his colleague Mr. Skeet worries that modern markets are not prepared for this new world.
“Some people are too reliant on models without asking questions,” he said. “We ought to go from a highly technical, data-driven, data-sensitive approach to a more intuitive, qualitative approach.” Mr. Konrad is the only one on his desk with a humanities degree.
The other four have either mathematics or science degrees, like most traders on the floor.
While Mr. Konrad spends part of his time trying to gauge shifting political currents, his more mathematically minded colleagues model his thoughts for trading purposes. The results are not always consistent, he conceded. “There is some irrationality to the market,” he said.
nytimes.com
These days, he takes bets on the muddy terrain that is European politics.
Mr. Konrad trades up to £3 billion, or $4.7 billion, worth of euro zone bonds a day for Royal Bank of Scotland. The bets are just as uncertain in both fields, but the sums are vastly larger in his current job, amounts that seem to stagger even him.
“How do you make someone understand that you’ve traded a billion worth in bonds?” Mr. Konrad said. “A billion. It’s easy to get lost in the zeros.”
The bond market has emerged as a mighty protagonist in Europe’s economic crisis, representing a seminal shift in power from politicians to investors and a relatively obscure cohort of bankers.
Their collective day-to-day judgment can now topple governments and hold the key to the survival of the euro.
If that market seems an unfathomable Goliath to outsiders, in interviews bond traders themselves confessed to being fearful and confused.
They now juggle astonishing levels of risk and wealth for investors — some 6.7 trillion euros, or $8.3 trillion, in euro zone government debt, according to the European Central Bank.
Fundamental economic concerns that some European countries have too much debt is a major factor driving the market.
Many investors are worried about the medium and long-term risk of holding European government debt, and have made what they consider the rational decision to reduce their holdings or even bail out.
And while European leaders maintain that the common euro currency will survive the crisis, not all economists are so sure.
Some traders worry openly that too many of their colleagues lack the skills to decipher conflicting signals from Europe’s leaders in an industry ever more dependent on perception and political guesswork.
The short-term fluctuations of bond rates, they concede, are not always an accurate reflection of value and risk. Yet traders are being taken as the last word by politicians on any range of government policies — and are often misinterpreted, they said.
“We used to be able to measure everything to the nth degree,” said Tim Skeet, managing director of fixed income at the Royal Bank of Scotland.
“These days, nothing is measurable. This has become less about number-crunching and more about the oracle of Delphi.”
Economists tend to treat the bond market as a rational player imposing budget discipline on politicians. Politicians portray it as having the conscience of a mob, accusing “bond vigilantes” of undermining Europe’s recovery and its cherished welfare state.
The reality is more nuanced. That fear among traders and their jittery investors helps explain why rates have surged for troubled countries like Italy and Spain, and why interest rates have hovered near negative territory for more trusted German bonds: so terrified are investors that they are effectively paying Berlin for the privilege of lending it money.
But in risk, there is also profit — lots of it — as well as loss. The amounts now at the command of the bond market have made it vulnerable to the kinds of speculation, volatility and returns more associated with the stock market.
As government debt across the European Union has reached 88 percent of gross domestic product, and much higher in a number of countries, according to Eurostat, some sovereign debt funds have made investors annual returns of 9 percent.
Of course, investors who held Greek government bonds suffered steep losses when that country defaulted. With so much leverage at its disposal, the bond market’s judgments can have the power of prophecy — that is, they can be self-fulfilling, influencing events even as traders assess them from the trading floor.
If investors and traders judge Spanish bonds to be risky because Spain’s government may default, they help make it more likely that Spain will indeed default, by raising its borrowing costs.
“Whatever the Spanish government does — and it has done a lot — it doesn’t actually help much, because the market is pretty much convinced a full-fledged bailout is required,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy, a consulting firm in London that specializes in sovereign credit risk.
It has not helped, of course, that for months the Spanish government denied or misrepresented the depths of its banking problems.
Nor that before Spain ran into trouble, Greece had already defaulted on its debts. And given Spain’s deep economic problems, some believe that a bailout may be needed.If politicians expected the bond market to speak with one voice, traders commonly complained, it would help if politicians did, too.
Olivier de Larouzière remembers calling a crisis meeting in the Left Bank offices of Natixis Asset Management in Paris during one watershed moment in June.
That day, Mr. de Larouzière, who as head of fixed-income euro securities at Natixis manages 18 billion euros worth of debt, watched as the yield on Spanish 10-year bonds climbed above 7 percent while Chancellor Angela Merkel of Germany and her European counterparts scrambled to persuade markets that a bailout for Spain would not be needed.
The yield, or interest rate, on a bond rises as its price falls. Both reflect the risk of the investment.
The rise in the rate meant that bonds Mr. de Larouzière had previously purchased were losing value. When the news ticker on Mr. de Larouzière’s screen announced that leaders had agreed in principle to lay the groundwork for the banking union that markets had been clamoring for, the yields eased back. But his relief did not last long.
“After the weekend, questions began circulating on the floor,” he recalled. “We suddenly realized that this would only really take effect in 2013.” Once stung, Mr. de Larouzière was left too wary to buy Spanish debt. He was not the only one.
A week after the summit meeting, rates were higher than on the eve of the talks. That kind of negative perception — prompted at least in part by legitimate concerns that European leaders do not agree about what to do — can be infectious, particularly when mixed with real economic data that has grown increasingly alarming.
These days Mr. de Larouzière says, “Italian bond yields should not be where they are,” meaning he thinks the country’s progress in making policy overhauls was better than it was being given credit for.
But he is still selling his Italian debt, fearing that collective pessimism will make it harder for Rome to raise the 100 billion euros it needs this year.
“This is less about economic fundamentals and more about fundamental human emotions — it’s about fear,” he said. Of course, skeptics would counter that for all the policy progress that Italy has made, its bond prices reflect worry that its debt level remains uncomfortably high.
Those concerns are new for most traders who came of age when much of Europe carried a triple-A credit rating. The picture has changed so quickly that Mr. Konrad, though not yet 30, has straddled the two eras.
On the Royal Bank of Scotland trading floor, Mr. Konrad sits behind a wall of real-time numbers: yields, futures and a spreadsheet with color-coded bond issues flicker across seven computer screens. But these days his history degree comes in handy.
To come up with the 600-plus price quotes a day he makes for his bonds — about one a minute — Mr. Konrad’s assessment of a country’s election results is in many ways as important as its G.D.P. report.
As someone who has studied German and French literature, his colleague Mr. Skeet worries that modern markets are not prepared for this new world.
“Some people are too reliant on models without asking questions,” he said. “We ought to go from a highly technical, data-driven, data-sensitive approach to a more intuitive, qualitative approach.” Mr. Konrad is the only one on his desk with a humanities degree.
The other four have either mathematics or science degrees, like most traders on the floor.
While Mr. Konrad spends part of his time trying to gauge shifting political currents, his more mathematically minded colleagues model his thoughts for trading purposes. The results are not always consistent, he conceded. “There is some irrationality to the market,” he said.
nytimes.com
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