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Buy-Side Money Going to Fixed Income and Technology

Traders Magazine Online News, March 8, 2017

John D'Antona Jr.

So, what are trading desks around Wall Street spending their money on?

According to a recent report from Greenwich Associates, institutions are allocating their increasingly scarce resources to fixed income pursuits and technology. Furthermore, these managers are approaching overall major changes with trepidation and are cautiously watching how the macro economic picture shakes out under President Trump.

Why fixed income? Why not equities or options or foreign exchange?

The ramp up in fixed income spending is directly linked to the expectation interest rates will shift in the coming months and years. After years of low and steady interest rate policy, the Federal reserve has made it very clear that the day of ultra-low interest rates has come to an end – as current forecasts point to a hike in short term rates this month – the first increase since 2015. And future rate hikes are also likely, with many pundits calling for two more interest rate hikes in the next 12 months totaling at minimum, 75 bps.

Improvements in the economy and the possibility of fiscal stimulus have increased the chances that the Federal Reserve will raise interest rates this month, said Fed Governor Jerome Powell in a speech just last week. Futures markets are putting as much as a 90% likelihood that rates will be raised by at least 25 bps at the next meeting which begins on March 14. Some traders told Markets Media that the Fed could surprise the market could bump rates even higher – 50 bps – given recent comments on fiscal policy and wage push inflation pressures.

Kevin Kozlowski

Rising interest rates make fixed income products cheaper and thus more attractive to investors. Also, a rising rate scenario negates prepayments and makes fixed income securities, such as MBS and ABS, very attractive to investors who fear getting their principal investment earlier than expected and having to reinvest these monies at lower market rates. 

The increase in technology spending is much more intuitive as structural and regulatory changes in the marketplace, such as MiFID II compliance and other regulations, have been prime drivers of technology spending. In order to maintain efficiency, desks need to have the latest and best technology at their collective fingertips to preserve alpha and meet retail investor demands to keep operating costs low and transparent.

In the Greenwich report, “Technology Helps Buy Side Prepare for Uncertainty,” the consultancy added that despite these shifts, institutions did hold off from making any wholesale radical changes on their trading desks in 2016 as they assessed the impact of macro-economic variables including the Trump victory in the United States, the ongoing Brexit process in Europe and long-awaited action by the U.S. Federal Reserve.

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