Analysis: Bond traders are regaining their swagger in interest-obsessed markets

NEW YORK, January 17 (Reuters) – Bond traders are once again stars on Wall Street.

Fixed income, currency and commodities (FICC) traders boosted bank profits last year despite bleak deal markets. And traders who have navigated the renewed market volatility are poised to extend their winning streak, senior bankers told Reuters.

At Bank of America Corp. (BAC.N), FICC revenues rose 49% to $2.3 billion, pushing the trading division’s annual revenue to its highest level since 2010, the bank’s earnings report showed on Friday. At Citigroup Inc (CN), fixed income revenue increased 31% to $3.2 billion in the fourth quarter, while JPMorgan Chase & Co (JPM.N) increased 12% to $3.7 billion.

“Everyone is a macro trader now,” said Jim DeMare, president of Bank of America’s Global Markets division, referring to investors betting on assets affected by economic trends.

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

FICC traders are enjoying a renaissance after years in the doldrums. In a throwback to the 1970s, inflation is once again agitating economies. Protectionism is back. And economic data is sending a buzz through the trading rooms minus the screams of previous eras.

“Another strong performance in trading helped offset the decline in investment banking activity across the industry,” 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 as the Federal Reserve and other central banks have aggressively raised interest rates over the past two years. Traders expect to stay busy as growth slows, the pandemic eases, fighting continues in Ukraine and tensions between the US and China ease.

Their comeback coincides with economic policymakers dusting off their pre-2008 playbooks. After the financial crisis, central bankers in the United States and advanced economies stabilized markets by keeping interest rates around zero. But when the pandemic hit, they ramped up stimulus to avoid economic disaster. The reversal of that policy has shaken the markets.

“There has been no shortage of extraordinary, once-in-a-generation events, reactions and implications,” said Ashok Varadhan, co-head of Goldman Sachs’ newly merged global banking and markets division in New York. “That’s been a catalyst for activity and opportunity” for customers, he said.

Goldman reported a 44% increase in FICC revenue to $2.7 billion in the fourth quarter, driven by tariffs, commodities and credit, according to earnings reports Tuesday. Morgan Stanley’s fixed income income rose 15% to $1.4 billion during the same period.

The S&P 500 stock index (.SPX) fell 19.4% last year as the 10-year US Treasury yield rose to 3.8%, while the dollar rose 7.9% against major currencies.

Tradeweb Markets Inc (TW.O) electronic bond trading platforms increased average daily volumes by nearly 10% in 2022.

“This is the kind of market where those old-fashioned fixed income skills come into play more than ever,” said Billy Hult, who became CEO this month. Hult gives the company’s interns copies of “Liar’s Poker” to reinforce his point.

Michael de Pass, head of rates trading at Citadel Securities, sees volatility and activity remaining high with participants laser-focused on US inflation data. That has overtaken the monthly jobs report as Wall Street’s most-watched economic indicator, he said. Citadel Securities will expand into inflation swaps in 2023.

At Jefferies Financial Group Inc (JEF.N), revenue from bond trading increased 71% in the fourth quarter.

“Fixed income is making money again” for bond investors, said Jefferies president Brian Friedman. “It used to be the search for yield; now it’s a choice of yield.”

Fed officials on Thursday expressed relief that inflation eased in December, paving the way for a potential move back to a quarter-point rate hike on January 31. Markets are watching the Fed closely for signals.

“Now if you went to one of our traders in any asset class — stocks, mortgages, commodities — they would tell you they trade US interest rates,” said Troy Rohrbaugh, global head of markets at JPMorgan, who traded currency options. earlier in his career.

“Volumes remained high for much of 2022 and investors were looking for an indication of when inflation is going to turn around. If so, I would expect their risk appetite to increase immediately,” Rohrbaugh said.

Reporting by Lananh Nguyen; Additional reporting by Davide Barbuscia and Ira Iosebashvili; Edited by Richard Chang and Jonathan Oatis

Our Standards: The Thomson Reuters Principles of Trust.