You should expect an interest hike in the U.S. before Christmas. Growth is accelerating in the U.S. and it's unlikely that the Fed will resist calls to increase interest rates before too much longer. What will that mean for fixed income, currencies and commodities (FICC) sales and trading jobs on Wall Street?
The most obvious answer is that an interest-rate hike will lead to more volume for rates traders, which will boost hiring for those desks. And while that is certainly a plausible scenario, it's more complicated than that.
Suddenly, it looks like there will be FICC jobs
Despite the uncertainty created by Donald Trump's election, there's a renewed sense of optimism among both banks and hedge funds, according to Daniel Gramza, a trading coach and the founder and president of Gramza Capital Management and DMG Advisors.
Daniel Gramza, a trading coach and the founder and president of Gramza Capital Management and DMG Advisors, senses cautious optimism at the banks, brokerages and hedge funds he works with despite post-election uncertainty.
"The Donald Trump election creates a high degree of uncertainty about expected market behavior in the future. This uncertainty creates volatility and volatility creates trading opportunities in fixed income, currencies and commodities across the board,” he said. “I believe there be an increase in demand for sales and trading jobs in the future.”
FICC trading desks have been decimated over the past few years, but the the pending interest rate hike is a good thing for certain asset classes, particularly rates, according to Dylan Pany, managing principal and head of the sales, trading and research team at recruiters Selby Jennings.
With the resurgence in the fixed income market, many banks are looking to establish or reestablish their U.S. businesses, especially tier-two and tier-three banks, Japanese and Canadian banks hiring in sales and trading with more market share up for grabs," he says
“Rates and credit specifically, especially structured credit and securitized credit, experienced the biggest cuts as a lot of banks exited those lines, but they are coming back,” he said. “Tier-two and tier-three banks are making strategic hires and looking to add headcount in those businesses, which is perceived to be less impenetrable than it was before."
Pany says that larger banks are unlikely to make many hires for their FICC trading desks. However, the cuts are likely to slow, says Anna Shtromberg, principal at Viable Markets, a former director and senior portfolio manager at National Australia Bank and an ex-credit trader at Natixis
“This year there were cutbacks in that space, so they will certainly pause the firing for the time being before eventually adding headcount,” she says.
FICC salespeople and traders still face long-term challenges
For the sell-side, as bond origination lowers, revenues decrease. Assuming that interest rates increase, the cost of borrowing money will increase as well. This may have a drastic impact in the high yield bond market specifically, according to Vuk Magdelinic, the CEO and co-founder of Overbond, which digitizes bond origination and issuance. If high-yield companies take a hit in this environment, both jobs and compensation could be impacted negatively, he said.
"In a very basic economic sense, less revenue means less revenue to compensate sales and trading employees in the field," Magdelinic said. "Here is where we may see the greatest impact.
"We may expect to see lower bond issuance, which may impact FICC sales and trading as the volume of bond origination decreases," he said. "Nonetheless, a majority of bond financing is for corporate purposes – businesses will need to raise money regardless.
"It can be predicted that a potential interest rate hike will have a negligible effect on FICC sales and trading jobs in the short-term. But with FICC predictions looking undesirable for future years to come, and technology allowing banks to replace staff to save money on costs, sales and traders in the industry are not in the clear just yet."
Risk on or risk off? Buy-side traders will benefit
The impending interest rate hike and ensuing volatility will certainly test the liquidity capacity of the financial services industry. With all of the capital rules and lack of risk taking from the big banks, if and when interest rates go up, the buy side will step in, believes Shtromberg.
“When rates go up, [big banks] don’t want to be the first ones to step in – no one wants to catch a falling knife – so the question is when will they step in?” Shtromberg said. “How far will rates have to go up for the sell-side and buy-side community to step in?”
For the buy-side, a Fed hike in interest rates will cause the size of the overall liquidity pool to decrease, and money may flow out of bond funds, Magdelinic said.
"Within specific areas, it can be expected that the hedge fund buy side will perform much better than exchange-traded funds, due to the general lack of flexibility in ETF strategy," he said. "Therefore, job prospects and security are much greater for hedge funds than ETFs."
The rest of the world isn’t looking any better – the U.S. is a bright spot for getting yield with relative stability, and even without knowing what the new administration will bring in, foreign investors are happier to invest in the U.S. now, Shtromberg said.
“Last quarter [3Q of 2016], fixed income had one of the best quarters we've seen in a year or 18 months, and the next quarter is likely to be strong for FICC trading as well, so we may have good momentum going into next year,” she said. “With the election out of the way and FICC trading volume going up, there will not as much issuance as the past couple of years, but the secondary trading might pick up.
“It's hard to say for sure whether sell-side traders will suffer or the buy-side traders will benefit, but buy-side firms may have an edge over the sell side with rates going up as they decide on their asset allocations next year.”
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