New bonus fears for traders at Deutsche Bank and Barclays

As we approach the fourth quarter and therefore the end of the year and therefore bonuses, a nasty thought is starting to percolate around some corners of some trading floors: what if too much was spent on new hires?

It's a thought that's particularly poignant on rates desks. 2017 has been a year of big rates hiring, but rates revenues haven't exactly followed through. In a note out last week, banking analysts at J.P. Morgan predicted that fixed income currencies and commodities (FICC) revenues will fall 25% in the third quarter, with rates revenues falling most of all. That's bad news for banks which have spent the previous nine months stocking up on traders.

Some of this year's most vigorous hiring in the rates space has happened at European banks. Headhunters say that Deutsche, for example, just recruited Greg Slawsky, a director-level rates salesman from BNP Paribas, to join its team in New York City. As with previous Deutsche hires, Slawsky is understood to have been well-incentivized to make the move. Deutsche has also made a late hire to its European government bond desk in August and it hired Eric Zijdenbos as a managing director in London in June. Some of these hires were replacements, but Deutsche is also up against a $60m loss on its U.S. rates desk earlier this year and could benefit from a strong Q3.

Deutsche isn't alone in having added rates staff. Despite (or maybe because of) a 20% decline in macro revenues year-on-year in the first half, Barclays has recruited with even greater enthusiasm, adding BNP Paribas' head of inflation trading in NYC in May, a new head of EMEA macro distribution from BAML in June, and a new head of macro trading from Brevan Howard and an MD from BlackRock in September . UBS has also been rebuilding its macro business, courtesy of Goldman Sachs.

With rates revenues squeezed, it's starting to look like European banks may have done too much too soon. "They've overspent and you're going to see that in the bonus pool," says one fixed income headhunter in London.

By comparison, headhunters say U.S. banks like Morgan Stanley - which had planned to hire six or seven people for its U.S. macro business this year, have only hired one or two. "At the start of this year they were saying they were lean and had capacity to add people after their cuts," says one headhunter. "Ultimately they decided not to."

Not everyone is of the opinion that European banks have overstepped. Canice Hogan, the former head of interest rate/FX/ EM and credit sales at Nomura who now runs headhunters Shadowhound, says the Federal Reserve's move to raise rates and (likely) reduce its balance sheet from October should introduce some much needed volatility into the market. Similarly, he says this year's build-out was simply necessary hiring after six very quiet years following 2010.

A London macro headhunter agrees. "What you've seen this year - particularly in rates sales - was mostly just replacement for people who were let go historically. These desks were very lean. This year's recruitment was also preemptive, in anticipation of  2018 and beyond as rates rise and volatility returns. It doesn't matter if revenues are low in Q3."

Even so, rates desks could yet be squeezed in the coming bonus round - particularly if headcount has swollen in preparation for next year. "No one wants to hire now," says one London headhunter. "From here to January it's all about protecting the bonus pool."

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Photo credit: Bill fears change. by Jared Cherup is licensed under CC BY 2.0.