Analysis-Bond Traders Are Choosing Back in Rate-Based Markets | The Mighty 790 KFGO

by Lananh Nguyen

NEW YORK (Reuters) – Bond traders are once again the stars of Wall Street.

Fixed income, currency and commodity (FICC) traders boosted banks’ earnings last year despite dismal deal markets. Senior bankers told Reuters that traders who have weathered the market’s renewed volatility are determined to extend their winning streak.

At Bank of America Corp., FICC revenue jumped 49% to $2.3 billion, pushing the trading division’s full-year revenue to the highest level since 2010, the bank’s earnings report showed Friday. At Citigroup Inc, revenue from fixed income rose 31% to $3.2 billion in the fourth quarter, while at JPMorgan Chase & Co it rose 12% to $3.7 billion.

“Everyone is a macro trader now,” said Jim Demare, Bank of America’s head of global markets, referring to investors who bet on assets affected by economic trends.

“Everyone wants to talk about inflation, everyone wants to talk about central bank policy,” said DeMare, who previously worked at Salomon Brothers, the legendary bond shop featured in Michael Lewis’ 1989 classic, “Liar’s Poker.”

FICC Dealers is enjoying a renaissance after years of stagnation. In a throwback to the 1970s, inflation once again disrupted economies. Protectionism is back. And economic data sends a buzz across trading rooms, minus the screams of bygone eras. “Another strong performance in trading helped offset an industry-wide decline in investment banking activity,” Daniel Pinto, president of JPMorgan, wrote in a note to staff. The bank’s markets division posted its second-highest annual revenue on Friday.

Bond specialists are in high demand in the $22 trillion Treasury market, where the Federal Reserve and other central banks have raised interest rates exponentially over the past two years. Traders expect to stay busy as growth slows, the pandemic subsides, fighting continues in Ukraine, and tensions between the US and China rise.

Their return coincides with economic policymakers dusting off the pre-2008 playbook. After the financial crisis, central bankers in the United States and advanced economies kept markets stable by keeping interest rates near zero. But when the pandemic hit, they ramped up incentives to avoid economic disaster. The reversal of these policies has sent markets into turmoil.

“There has been no shortage of extraordinary once-in-a-generation events, responses and impacts,” said Ashok Varadhan, co-head of the newly merged Global Banking and Markets division at Goldman Sachs in New York. “This has been a catalyst for activity and opportunity” for customers, he said.

Goldman Sachs will report its earnings later on Tuesday.

The S&P 500 fell 19.4% last year, when the 10-year US Treasury yield jumped to 3.8%, while the dollar gained 7.9% against major currencies.

On Tradeweb Markets Inc’s electronic bond trading platforms, average daily volumes are up nearly 10% in 2022.

“This is the kind of market where the old-school fixed income skill set plays a role more than ever,” said Billy Holt, who became CEO this month. Hult gives the company’s interns copies of “Liar’s Poker” to underscore his point.

Michael De Pas, head of trading pricing at Citadel Securities, sees volatility and activity as still high with participants laser-focusing on US inflation data. That usurped the monthly jobs report, he said, as the most watched economic indicator on Wall Street. Citadel Securities will expand into inflation swaps in 2023.

At Jefferies Financial Group Inc, fourth-quarter bond trading yields jumped 71%.

“There’s money to be made in fixed income again,” Jefferies President Brian Friedman told bond investors. “Before it was the search for yield; now it is the selection of yield.” Federal Reserve officials on Thursday expressed relief that inflation eased in December, paving the way for a potential downturn to a quarter-point rate hike when they meet on January 31. Markets are watching the Fed closely for clues.

“If you go to any of our traders now in any asset class — stocks, mortgages, commodities — they’ll tell you they trade US interest rates,” said Troy Rohrbaugh, head of global markets at JPMorgan, which trades currency options earlier in his career.

Volumes have remained high for most of 2022, and investors have been looking for a sign of when inflation will turn around. When that happens, I expect their risk appetite to increase immediately.

(Reporting by Lanan Nguyen; Additional reporting by Davide Barbuscia and Ira Iosbashvili; Editing by Richard Chang)

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