HSBC joins AI race with new trading tool HSBC has rolled out its own version of ChatGPT for institutional investor clients in the latest sign of an intensifying race between major investment banks to develop artificial intelligence tools. The bank's AI Markets platform uses natural language processing, the same AI behind ChatGPT, to provide clients with access to proprietary data from HSBC's global markets division that can be used to price and execute transactions or produce real-time market commentary. HSBC said more than 4,000 users were already live on the tool, which taps into the bank's centralised in-house database to draw information from sources including internal emails and chats between salespeople, traders, and clients. Allen Li, head of foreign exchange options automated trading and electronic risk, acknowledged that clients hadn't typically associated this kind of innovation with HSBC. "This tool is really changing people's perception of HSBC and proves that we're succeeding in our renewed focus on digitisation: reacting quickly to the needs of clients with the right technology," said Li, who was heavily involved in the tool's development. IFR has not been able to talk to any users of the platform to verify how well it works, but it is certainly true that banks have been ramping up their investment in AI over the past few years, a trend that has accelerated since the launch of ChatGPT last year that opened the world's eyes to the power of AI. Many finance executives believe well-designed AI tools will revolutionise the way their firms do business by allowing them to deploy the vast reams of data in their systems more efficiently, whether that's in pricing securities or interacting with clients. Some are still proceeding with caution. Concerns over security have prompted many banks to ban staff from using external AI programmes like ChatGPT, while data accuracy concerns have proved a stumbling block when building in-house platforms. But those forging ahead, including the likes of BNP Paribas and Deutsche Bank, are convinced that NLP and other forms of AI will give them an advantage over rivals. Li said the quality of the information HSBC was putting in clients' hands through AI Markets should give the bank a competitive edge. "We're providing actual, tradable data to clients – all of which is proprietary to HSBC," he said. In a similar concept to ChatGPT, AI Markets provides HSBC's institutional clients with a digital assistant that can perform tasks across different asset classes. Clients can plug into the tool via the bank's single dealer platform, through external platforms like Symphony, or directly through an API connection. Users can type a request into the tool's chat-box, which is fed through HSBC's central database to produce a near instantaneous response. The bank also plans to offer the service to large corporate clients in due course. "AI Markets is essentially a gateway into our global markets capabilities and services where all of our information, analytics, pricing, execution, and workflow are available," said Li. "It really is designed as a one-stop shop."

COMMENT - Updating our long-term bear bond call Two years ago, we made a call that government bonds in developed markets were beginning a long-term, secular, bear move, after a decades-long bull market. We updated that view a year ago (Eikon news code nIfp3X899m), and update it again now. The call has been borne out, at least so far. Yields didn’t move much until late 2021, but the rise since then has been sharp. Its speed and extent have been greater than any yield move since the mid-1980s. We believe that the rise in yields will continue over the coming months, but at a slower pace than that with which they have risen so far. 10-year German bond yield: Fundamental arguments Central banks are now raising rates at a slower speed than they were six months ago. Some may even be about to stop, or pause, rate rises. Nonetheless, there are still powerful fundamental and technical reasons to believe that bond yields will continue to rise for some time to come. Inflation will likely remain higher than central bank inflation targets over the coming months. Central banks have tightened monetary policy to what they believe are restrictive levels. However, inflation rates will probably fall much more slowly than they, and markets, currently anticipate – and remain much higher than they were prior to the pandemic. The reason for this is simply that the world economy has changed. Globalisation has gone into reverse as a concept, even as world trade has increased. This was already taking place before the pandemic, with the global rise of populist politics. But the pandemic and Russia’s war in Ukraine has accelerated it. Resource protectionism and geopolitical tensions with trading partners are both on the rise. The frictions they cause, particularly between China and the West, are likely to increase, making high inflation part of the structure of the global economy. Inflation and real rate expectations will likely continue to rise as a result, and more term premium will be built into the yield curve. That would not only drive longer-dated yields higher, but also give positive shapes to yield curves. A shorter-term argument is that central banks might need to continue tightening policy far beyond levels currently expected. Headline inflation seemed to have peaked in most economies last autumn, but it remains high and is coming down slowly, if at all. Inflation levels in Europe are particularly high. Core inflation, excluding food and energy prices, appears to have peaked in the US. But in the euro area it is only 0.1% below its peak so far, while in the UK it is still rising. Against that backdrop, labour markets remain very tight. Central banks are concerned about the potential for second-round effects coming from wage inflation. To avoid it, they may need to keep tightening policy until slack is created in labour markets, in effect by triggering sharp economic slowdowns. Most central banks, the Bank of England a possible exception, believe that they are nearing the end of their tightening cycles. However, they may be underestimating the persistence of inflation, for the same reasons they have up to now. There appears to be a deep-seated problem with inflation forecasting. This stems from a reliance on calculations made in a framework based on the global economy as it was before the pandemic – whether numerically by econometric models, or cognitively by economists. This is the case among market participants as much as it is among central banks. Technical arguments Central banks were slow to raise rates in this cycle, and the market has consistently under-priced their terminal rates. As we said when making this call two years ago, we shouldn’t underestimate the psychological effects of decades of falling yields. Those who tried to fight the bull market in the years prior to the pandemic mostly lost money. It is taking time for investors to come to terms with the idea of permanently higher interest rates in a Pavlovian sense. Inverted slopes of yield curves de

Europe's leveraged loan banks flex pricing muscles The European broadly syndicated loan market is offering competitive pricing and flexibility to borrowers in its fight to stay ahead of direct lenders offering a more predictable outcome for buyout underwritings. Direct lenders have eaten into banks' market share since the outbreak of war in Ukraine, and while some direct lenders have subsequently trimmed their risk appetite, their foothold in the market appears permanent, with private equity firms in particular now routinely weighing up both options ahead of financings. "Sponsors are running a syndicated loan and direct lender process," said a leveraged finance banker. And there certainly are good reasons for borrowers to opt for the new kids on the block. "Direct lending is becoming a club product ... Although it is still more expensive, it means no meetings, no flex, no exogenous outcomes, and sponsors will pay for that solution,” the banker said. Europe-focused direct lending funds set a record in 2022 raising nearly US$47bn, according to data from Preqin. But fundraising in the first quarter of 2023 only reached around US$1bn, with some direct lenders trimming their risk appetite. Bankers in Europe, meanwhile, are keen to remind sponsors that syndicated loans are cheaper. And they point to one high-profile example further afield that appears to support that view: the financing to back Blackstone's purchase of Copeland, the climate tech unit of US manufacturing company Emerson Electric. In October, a US$5.5bn debt commitment was lined up by cobbling together enough institutions for a closely held term loan A and direct lending facility, but costs saw the borrower perform an about-face and turn to the broadly syndicated loan and bond markets in May to sell a US$2.775bn dual-currency bond and raise a US$2.725bn term loan B. Sponsors are, in the main, the ones driving the pivot to direct lenders, while companies are more tied to the bank market, bankers said. "For sponsors, the concerns are around the original issue discount, while the CFO [of a corporate] cares about the cheaper cost of funding from a margin perspective, and gets nervous if they are dealing with higher margins than those they had become used to," said a second leveraged finance banker. While the headline margin for a broadly syndicated loan is cheaper than the private credit option, the flex and underwriting fees narrow the pricing differential. And there are multiple other factors for borrowers to weigh up. David Altenhofen, senior portfolio manager at PensionDanmark, sees private credit growing market share, but acknowledged that a broadly syndicated loan can act as a platform on which to build. "In the private market, deals have shorter time to market ... with much fewer creditors than in the broadly syndicated market," he said. "This, on the other hand, can hamper flexibility, including the ability to tap credit lines further and so on. We will have LBOs and M&A in the future as well, and these will need financing. The broadly syndicated loan market looks like a good way to do just that, and CLOs are a good way to find the financing for the loans." Limitations There are also limits to the reach of private credit. "Direct lending is here to stay – any deal, any size is viable," said the first leveraged finance banker. "But a lot of these direct lenders, for all of their scale, have modest infrastructure and issues with how to get to certain places. The first generation of deals has gone well, but what happens when it goes wrong? Banks can absorb periodic losses. But what about the funds? Will we have to see some of the funds renege on protections?" Greater flexibility around covenants is another advantage for borrowers using the broadly syndicated market, nor will direct lenders open their doors to all. "The direct lenders in some cases are going to sponsors with a capital structure already laid out and ready to go," said a buysider. "They are very picky about which sectors or credits they

UK accuses five banks of Gilt market breaches The UK’s competition regulator said traders at five banks might have breached rules about cartels by sharing sensitive information on various aspects of the Gilt market in electronic chats. The Competition and Markets Authority named Citigroup, Deutsche Bank, HSBC, Morgan Stanley and Royal Bank of Canada in a provisional finding. The traders' behaviour is alleged to have taken place between 2009 and 2013. The CMA said traders swapped pricing details and information on their strategies in Gilt auctions and subsequent buying and selling of Gilts. Citigroup, Morgan Stanley and RBC are also accused of sharing information about buybacks by the Bank of England as part of its asset purchase plans. “By unlawfully exchanging competitively sensitive information rather than fully competing, the banks involved in these arrangements could have denied the full benefits of competition to those they traded with,” the CMA said in a statement. It claimed this would have affected pension funds, the UK Debt Management Office and UK taxpayers. “A properly functioning, competitive bond market benefits tens of millions of taxpayers and pension savers as well as being at the heart of the UK’s reputation as a global financial hub,” said Michael Grenfell, executive director of enforcement at the CMA. “These alleged activities are therefore very serious and warrant the detailed investigation we have undertaken. We will now consider further representations from the parties before reaching a final decision.” Banks' reactions Deutsche first alerted the CMA about its participation and received more lenient treatment. It will not be fined. Citigroup subsequently applied for leniency after helping the enquiry and its fine will be discounted. Both banks admitted to conducting anti-competitive behaviour. No final fines have yet been levied. Citigroup has already entered a settlement agreement with the CMA, which will give it a further discount on any eventual fine. “We have cooperated fully with the CMA on this matter and are pleased to put it behind us,” the bank said. After the enquiries are concluded, banks that have been found to have acted anti-competitively will face an infringement decision and could face fines of up to 10% of the institution’s worldwide turnover. However, in practice that is expected to be reduced after factoring various mitigations. The investigation was opened in November 2018. The CMA said HSBC, Morgan Stanley and RBC had not admitted any wrongdoing and no banks could yet be assumed to have broken the law. The banks will now have a period to respond to the statement of objections each has received. Morgan Stanley said it had “cooperated fully with the CMA during this investigation” and would continue to “constructively engage in the process” but said it disagreed with the provisional allegations. “We … intend to contest them,” it said. RBC said it had also cooperated fully with the CMA and disagreed with the findings. “We take any allegation of employee misconduct very seriously,” it said. HSBC said it “refutes the CMA’s allegations. We will continue to make our case to the CMA as appropriate whilst we await a final decision”. European precedent Two years ago the European Commission fined UBS, Nomura and UniCredit €371m for participating in a cartel among European government bond traders across seven banks between 2007 and 2011. The other four banks involved, Bank of America, Royal Bank of Scotland, Natixis and WestLB, escaped fines. RBS revealed the cartel to the commission and the other banks played minor roles. That decision led to a temporary ban on all seven banks, and others who had previously breached antitrust rules, from pitching for mandates to handle deals for the European Union's €800bn NextGenerationEU funding programme. However, most of the banks were reinstated in the proc