Goldman Sachs excepted, the first quarter was pretty good for fixed income sales and trading revenues at U.S. banks. They all saw double digit year-on-year revenue rises; Morgan Stanley achieved a massive increase of 96%. So, does this mean banks are ready to hire fixed income traders again? Still no.
Headhunters say banks are certainly hiring across fixed income but that it's replacement hires rather than real growth. The only area where there's any real build-out is emerging markets. Elsewhere it's is about gap-filling and waiting to see how things pan out.
The shape of the fixed income trading recovery is partly to blame. Fixed income trading is many things. The term covers everything from credit, to FX, rates, commodities and securitization. Citi and Bank of America are the only two U.S. banks to break out revenues for credit and macro products in their fixed income divisions. As the first chart below shows, credit did well in terms of revenue growth during the first three months of this year at the two banks, macro less so.
This might be grounds for hiring in credit, were it not that the pattern for the recovery in the first quarter (Q1) is unlikely to hold for the rest of 2017. Specifically, credit traders' success in the Q1 was linked to strong primary issuance which is expected to fall away as rates rise. Conversely, rising rates should drive stronger revenues from macro businesses in the second half.
"The first quarter surge in the primary debt markets was partly due to banks' own debt issuance as they loaded up on bail-inable debt to satisfy regulators," says Chris Wheeler, a banking analyst at Atlantic Equities. "That won't be repeated." Meanwhile, expectations of further U.S. rate increases and volatility in the euro around the French election should revive macro businesses, says Wheeler. "I'm sure some banks have made big money on the euro in the past week," he speculates.
The first quarter therefore looks like an anomaly - and no bank will add staff on this basis. It doesn't help that fixed income trading is slowly becoming more electronic, making human market makers less necessary than before. "Banks are all going to be very cautious about hiring because of the way markets have been," says Wheeler. "Rather than adding costs they'll want to make the most of the operating leverage they've already got in that business after several lean years."