Volatility sees spread products fall by half, report finds

Return of volatility this year has led to predictions that it’ll mirror 2020, with spread products that spiked in 2021 down and FX trading volumes up.

Volatility has seen spread products such as agency residential mortgage-backed securities and high yield credit dive 30-50% in the first quarter, a report by Coalition Greenwich has found.

This year is expected to mirror the volatility in 2020 – the report noted – sending spread products that had seen a surge last year into a downward spiral.

Conversely, markets to surge off the back of this year’s conditions include the FX markets, leaving G10 and emerging markets dealers up 20-50% in the first quarter according to Coalition Greenwich’s report.

Equity capital markets revenues have plummeted in this year to date, in some cases falling by 80% and reverting to pre-covid levels. New deal levels in the first quarter were also down 30-50%.

Despite rising interest rates, Coalition Greenwich predicted debt capital markets products to remain “relatively robust”.

“Inflation and rising rates, both of which will stay with us through all of 2022, can simultaneous act as a headwind and tailwind for the largest global banks,” Kevin McPartland, head of research at Coalition Greenwich market structure and technology, told The TRADE.

“Increased volatility so far this year has led to higher volumes – a good thing for trading desks. But the bear market in bonds – the first in decades – is causing losses where many in the market today have never seen losses before.”

Coalition’s report found that investment banking revenues surged last year on the back of equity capital markets growth driven by a strong performance in equities, increased M&A activity and special purpose acquisition companies (SPAC).

Equities trading revenues increased by 22% last year when excluding the $10 billion lag caused by the collapse of Archegos Capital Management and 5% when including it.