Stock Market

Analysis: Bond traders get their confidence back in markets that are focused on rates.

Bond traders are the talk of Wall Street once again.

Even though the deal markets were dull last year, traders in fixed income, currencies, and commodities (FICC) helped banks make more money. Senior bankers told Reuters that traders who have done well in the new market volatility are likely to keep winning.

Bank of America Corp’s (NYSE:BACFICC)  revenue went up 49% to $2.3 billion, making it the highest full-year revenue for the trading division since 2010. This was shown in the bank’s earnings report on Friday. In the fourth quarter, revenue from fixed income jumped 31% to $3.2 billion at Citigroup Inc. (NYSE:C) and 12% to $3.7 billion at JPMorgan Chase & Co. (NYSE:JPM).

Jim DeMare, president of Bank of America’s global markets division, said, “Everyone is a macro trader now.” He was talking about investors who bet on assets that move with economic trends.

Related: The Pound is gaining ground as traders look to the BoE for a response

“Everyone wants to talk about inflation, and everyone wants to talk about central bank policy,” said DeMare, who used to work at Salomon Brothers, the famous bond shop that Michael Lewis wrote about in his 1989 book “Liar’s Poker.”

After being stuck in a rut for years, FICC traders are having a renaissance. Inflation is shaking up economies again, just like it did in the 1970s. Protectionism has returned. And economic data makes trading rooms buzz, though there is less shouting than in the past. In a note to employees, JPMorgan President Daniel Pinto said, “Another strong performance in trading helped make up for a drop in activity in investment banking across the industry.” On Friday, the markets division of the bank had its second-highest annual revenue.

Since the Federal Reserve and other central banks have raised interest rates quickly over the past two years, bond experts in the $22 trillion Treasury market are in high demand. The traders expect to keep busy as growth slows, the pandemic goes away, fighting continues in Ukraine, and tensions between the U.S. and China continue to rise.

Their comeback is happening at the same time that economic policymakers are going back to plans they used before 2008. After the financial crisis, central bankers in the US and other advanced economies kept interest rates close to zero to keep the markets stable. But when the pandemic hit, they increased stimulus to keep the economy from going into a tailspin. The change in these policies has shaken up the markets.

Ashok Varadhan, co-head of Goldman Sachs’ (NYSE: GS) newly merged global banking and markets division in New York, said, “There has been no shortage of extraordinary, once-in-a-generation events, responses, and effects.” He said that had made clients more active and given them more chances.

Goldman will talk about its earnings on Tuesday evening.

Last year, when the 10-year U.S. Treasury yield went up to 3.8% and the dollar went up 7.9% against major currencies, the S&P 500 stock index fell 19.4%.

In 2022, the average daily volume of trades on the electronic bond trading platforms of Tradeweb Markets, Inc. (NASDAQ:TW) went up by almost 10%.

This month, Billy Hult took over as CEO. He said, “This is the kind of market where those old-school fixed-income skills are more important than ever.” Hult gives copies of “Liar’s Poker” to the interns at the company to make his point.

The head of rates trading at Citadel Securities, Michael de Pass, thinks that volatility and activity will stay high as long as everyone is so focused on U.S. inflation data. That has replaced the monthly jobs report as the most important economic sign for Wall Street, he said. In 2023, Citadel Securities will start offering inflation swaps.

In the fourth quarter, bond trading brought in 71% more money for Jefferies Financial Group Inc.

“There’s money to be made again in fixed income,” said Brian Friedman, president of Jefferies. “Before, they were looking for yield; now, they can choose yield.” Fed officials were glad to hear that inflation slowed down in December. This could mean that when they meet again on January 31, they could change the interest rate by a quarter point instead of a half point. The Fed is being closely watched by the markets for clues.

“If you went to any of our traders right now in any asset class—stocks, mortgages, or commodities—they would tell you they are trading U.S. interest rates,” said Troy Rohrbaugh, global head of markets at JPMorgan, who used to trade currency options.

Related: Stocks and bonds stumble as attention shifts to data.

“Volumes stayed high for most of 2022, and investors have been trying to figure out when inflation will start to go down.” “When it does, I think they’ll want to take more risks right away,” Rohrbaugh said.

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