Bank bond traders have grown increasingly alarmed as losses in corporate bond portfolios appear to be setting off a wave of layoffs on Wall Street.
American Banker has confirmed that two high-ranking corporate bond traders, who traded industrial debt, were fired in the past two weeks; the reason was losses in their firms' portfolios, other traders said.
Widespread reports of four more firings could not be confirmed.
Bank bond traders seem to be holding on to their jobs, but severe losses in their portfolios and the sudden departures of the corporate bond traders have made many jumpy.
Losses have been enormous for everyone on Wall Street, bank bond traders say. Liquidity has dried up, meaning that there are few buyers and many large brokerage houses have large inventories that traders cannot move.
In the last two weeks, bank bond spreads-the basis-point difference between the yields of Treasuries and of corporate bonds-have widened by as much as 25 basis points, a level not seen since 1994. Industrial debt spreads have widened by as much as 35 basis points and high-yield debt spreads by as much as 100 basis points. Emerging-market debt spreads have widened by as much as 500 basis points.
Industrial and bank bonds "are having a lousy year, but clearly if a sector is doing poorly and a person is not doing well it puts everybody under the microscope," said one trader who declined to be identified.
The apparent layoffs have only added to bank bond traders' worries. Salvatore Naro, senior managing director at Bear, Stearns & Co., abruptly left the company Wednesday after losses in the company's crossover-debt portfolio, market participants said. Mr. Naro had spent eight years running Bear Stearns' corporate debt division.
A spokeswoman for Bear Stearns declined to give details of Mr. Naro's departure.
A few days earlier Michael Meyer, a managing director in the corporate department at Merrill Lynch & Co., left. Sources said he was fired because Merrillwas concerned about the losses in its bond portfolio. Mr. Meyer, a well-respected trader, had worked for the company for seven years. The debt portfolio he was managing was rumored to have suffered losses in the past month. Mr. Meyer traded crossover debt, or bonds that fall between high- grade debt and junk status.
Merrill declined to discuss the reasons behind his departure.
Bond market experts said that the traders were among the first casualties in what appears to be one of the worst bear markets in corporate bonds.
"Everyone has had losses," said a former bank bond trader who declined to be identified. Mr. Meyer's departure "is confirmation that the market is taking a material turn for the worse. When a tremendously successful trader loses his job, it makes you question your ability to retain your own job."
It is also rumored that three emerging-market debt traders left Chase Securities Inc. and that a bond trader at Salomon Smith Barney Inc. was asked to leave because of losses.
The losses have been so severe-some estimated $85 million for Mr. Meyer's portfolio in the last month-that managers are beginning to point fingers, said one bond expert. In a good environment, some traders "have gotten cocky and started to make stupid mistakes like taking on too much risk."
Traders are well aware that losses often can lead to layoffs.
"Every trader on the Street goes to work every day knowing that they could lose their job because of losses," said another trader who requested anonymity. "But people think that it cannot happen to them."
Traders also are nervous about the large supply of debt that industrial companies and some banks are expected to issue this September. The supply probably will widen bond spreads further.
Additional losses could accelerate the departures of corporate bond traders. But some experts even doubt that a wave of layoffs is at hand.
Managers know "even Superman is not going to make money in this market," said a bond market expert.