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Crisis era? You ain’t seen nothing yet

Close up of math formulas on a blackboard

School of hard knocks? Try the school of high rates

The oldest millennials were born when the 10 year Treasury yield was 15.8% and the Bank of England base rate was 17%. During their professional careers, however, they have never seen either rate get near double figures.

They turned 40 this year. An ever-growing number of them are managing directors.

Now, no one likes to be condescended to by their elders, especially — if we accept the stereotype — millennials. But as markets pivot to an outlook in which interest rates could start to rise from their historic lows, maybe it is time to listen to them.

Because when rates start to rise, the business of buying and selling securities is going to look very different.

Bankers who have been happily selling bonds for years are suddenly going to find out about novel concepts such as underwriting risk. Sooner or later, they will feel the pain of holding a residual position in a deal that has not gone well.

They may even find themselves advising clients that, no, now is not always the best time to bring a deal to the market.

Syndicate bankers with a few years under their belts, who think they are already offering creative advice, may need to learn a few new tricks.

But it’s not just the sell side that will have to adapt. Treasury teams will have to learn patience. They may even have to hold off and trust the market to be open after September.

One grizzled DCM banker said he thought the buy side would have it hardest of all. In a world of rising rates, not investing at all might be the shrewdest move, though a portfolio manager is unlikely to be rewarded for it.

Having said all that, we will almost certainly witness a few things even the old-timers have never seen before. The next few years will be an unforgiving but rewarding training ground for everyone.

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