Pity the poor rates trader. According to report today from Morgan Stanley, volumes in FX and rates trading businesses are already at seven-year lows and are approaching 25-year lows. Unprecedentedly low volatility is to blame. As Goldman chief operating officer Gary Cohn said last week, the low rates have created an “abnormal trading environment….If markets never move or don’t move, our clients really don’t need to transact.”
And yet, interest rates could soon increase. Rates strategists are predicting that they’ll rise soon – especially in the U.K. where the economy is suddenly ‘booming.’
“We are looking at the increase in UK rate to materialize in Q4 this year at the latest,” says Peter Chatwell, senior rates strategist at Credit Agricole CIB in London. “The market is getting a lot of confidence that the Bank of England is going to be hiking rates in the not too distant future,” he adds. The U.S. Federal Reserve is also expected to raise rates sometime next year.
Some senior bankers are already calling a resurgence in volatility. Citigroup chief executive Mike Corbat is forecasting an increase in volatility in the second half of this year. Francesco Garzarelli, co-head of global macro and markets research at Goldman Sachs, is predicting that we will see, “more turbulence kicking in in the second half.” Deutsche Bank is hiring for its U.S. rates team. And in a seeming bet on a resurgence in rates trading revenues, Kavi Gupta – who formerly headed a group trading credit-derivatives indexes for Bank of America in the U.S. has just switched into a role leading a group trading interest rates swaps.
All things being equal, Chatwell says a resumption in volatility should lead to a resurgence in rates revenues. Unfortunately, however, all things are not equal. Banks everywhere, from Barclays to Credit Suisse, to Deutsche, to RBS are reducing the amount of capital allocated to rates businesses and shunting capital intensive long dated rates derivative products into their so-called ‘exit businesses.’ “It’s more complicated than just volatility – the money made from rates trading depends upon the amount of balance sheet allocated to that business,” says Chatwell.
Credit Suisse has already let go of some of its rates traders. Barclays and RBS are doing the same. Royal Bank of Canada is hiring, and Bank of America is expected to bolster its team once Michele Foresti gets his feet under the table.
Surprisingly, perhaps, headhunters say there aren’t too many unemployed rates traders sloshing around the market. However, there are a lot of rates traders who are set to be disappointed over their pay for 2014 – “Most people’s revenues are down 10% to 30%,” says one headhunter, speaking on condition of anonymity. “And that’s compared to last year, which was bad too.”