The world’s biggest banks just enjoyed their second-best year for rates trading in a decade as rising interest rates and soaring inflation brought lucrative turbulence to the market.
(Bloomberg) — The world’s biggest banks just enjoyed their second-best year for rates trading in a decade as rising interest rates and soaring inflation brought lucrative turbulence to the market.
The 10 largest firms made $24.1 billion in the most frequently-traded currencies, known as the G-10, according to data from Coalition Greenwich. That’s a 48% increase on the previous year. Only 2020 saw a better result, when pandemic volatility and emergency quantitative easing pushed returns to $26.7 billion.
“Central banks have been dominating the rates market and pushing it to uneconomic levels for over a decade. Finally they backed away,” Lindsay Politi, a bond trader at Connecticut-based One River Asset Management LLC, said in an interview. “Maybe this year won’t be quite as good as last year, but we’re in a new regime of more opportunities.”
The data include estimated returns for the likes of Goldman Sachs Group Inc., JPMorgan Chase & Co., Citigroup Inc. and Morgan Stanley.
Trading desks were back in vogue last year on Wall Street as firms steered resources away from underperforming investment banking divisions and served clients looking for repo loans and other financing products, said Aamir Hazaria, Coalition’s head of competitor research in India.
Also making bonds more attractive is the disappearance of negative-yielding debt — where investors effectively pay to hold the securities — from as high as $18 trillion in December 2020.
A closely-watched part of the US yield curve inverted to a four-decade extreme last year, a development typically seen as a negative sign for the economy because it signals the expected severity of central bank policy tightening could feed into a recession.
Trading these ructions helped Wall Street giants to withstand a grim year for fundraising and dealmaking. Goldman Sachs’s trading operation posted an 11% increase in third-quarter revenue led by fixed income. JPMorgan Chase saw a 22% jump in fixed income revenue in the same period, while Bank of America Corp.’s traders beat estimates as bond-trading revenue rose 27%. Macro hedge funds have also taken big positions in bonds, which in some cases delivered triple-digit returns last year.
Yet it’s also become a riskier proposition since central banks pulled back on their monetary largess, resulting in reduced liquidity that can leave traders exposed to large losses. “You have to be disciplined and make sure positions can be fairly quickly unwound if things don’t work,” Pasquale Cataldi, head of EMEA rates trading at Nomura Holdings Inc., said in an interview. “There’s a lot of people chasing similar trades and fewer people willing to provide liquidity, partly because traders have moved from banks to hedge funds.”
–With assistance from Nishant Kumar.
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