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Wall St basks in ‘Trump effect’ as trading soars

Trading volumes across markets have soared following the US presidential election, a boon to Wall Street investment banks as money managers prepare for a new environment under the future Trump administration. 

Since the November election result, there have been seven days when more than $20bn of investment grade debt has traded hands — a level that had previously only been breached 18 times since data has been collected back to 2005, according to the Financial Industry Regulatory Authority. Record trading volumes in the asset class have been achieved over the past two weeks, accompanied by an uptick in Treasuries, swaps, high yield corporate bonds, exchange traded funds and equity volumes.

The sustained increase in activity has buoyed some of Wall Street’s largest banks, with executives from Bank of America, Citigroup and JPMorgan projecting increases in revenues from their trading arms. Jamie Dimon, the chief executive of JPMorgan, said fourth quarter trading sales were up at least 15 per cent from a year earlier. His counterpart at Bank of America, Brian Moynihan, also put fixed income sales and trading revenues at 15 per cent above last years’ levels.

“We saw a significant paradigm shift in expectations in the wake of the Trump victory,” said Ian Lyngen, a rates strategist with BMO Capital Markets. “We’ve gone from expectations of more of the same with Clinton to an unknown world in terms of fiscal stimulus and what it means for the economy. People have subsequently started repositioning their investments.”

The promise of a surge in government spending and reduced taxes have propelled investors into stocks and riskier corporate bonds that they expect to benefit from faster economic growth. The repositioning has seen a wide cut to longer dated Treasury holdings, with short interest in benchmark 10-year Treasury futures rising to its highest level since January 2015, data from the US Commodity Futures Trading Commission showed on Friday.

Put volumes — options that give an investor the ability to sell an asset at an agreed price — on 10-year Treasuries have climbed rapidly alongside the sell-off in sovereign debt markets, hitting record levels as investors have scrambled to protect portfolios against the rise in yields, according to John Brady, managing director at RJ O’Brien, a futures broker. The yield on the notes has jumped to 2.47 per cent from as low as 1.71 per cent on election night. Yields rise as bond prices fall. 

Andrew Brenner, the head of international fixed income at National Alliance, pinned the increased activity on macro and risk parity hedge funds, as well as commodity trading advisers, the latter of which often employ computer-driven trading strategies.

“You are seeing a lot of activity in corporates . . . and Treasuries” he added. “You’ve got volatility coming back and you’ve got macro players that now have a green light.”

Trading in the more vanilla world of US stocks has also jumped, with volumes on the New York Stock Exchange, Nasdaq and NYSE MKT averaging 7.96bn shares a day since the election — 20 per cent higher than the typical day over the past five years. As benchmark indices have been thrust to record highs, investors have dumped shares of utilities and bought up financial and industrial companies.

“You see a real obvious change in leadership from technology to financials and basic industry,” said Michael Buchanan, deputy chief investment officer of Western Asset Management. “These are material shifts.”

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