There's an old theory on Wall Street—when firms add lots of staff, it's the sign of a top, and when they make the last round of cuts, it's close to the bottom. So that has some people thinking that maybe the musical chairs involving Wall Street's Treasury strategists this summer is a clear sign of change ahead for the bond market. There has been a not-so-coincidental number of high profile moves with some strategists landing in new positions, but some, so far not. "It could be like the top of the equity cycle where the most analysts in town are in the hottest sector," said one bond pro, who spoke on condition of anonymity. "Wall Street has a way of fighting the last battle without realizing there's a new war coming up." The point being that the Fed is about to raise interest rates for the first time in nine years, making the unprecedented move from near zero after holding fed funds there for six years. While many strategists see a bottom already in yield (which move in the opposite direction of bond price), they say the Fed's rate hike may be the last hurrah for super low yields. Traders have complained for years that there's been an almost surreal nature to the bond market due to the Fed's extraordinary easing programs, launched during the financial crisis. While rates have been held low and steady to boost the economy, trading has been nearly artificial in that spreads have been unusually tight and the market has had a bullish tilt for years. The move away from that environment could create far more bumps and make forecasting rates even dicier. "If the Fed is about to embark on hiking, and the banks are having to own more Treasurys for regulatory reasons, there's a new investor base that's going to have to fill the lurch as the Fed is going to get out of their Treasurys," said the pro. Strategists are the latest in a wave of restructurings that hit bond trading desks for the last several years. Just two months ago, Bank of America Merrill Lynch's Priya Misra left her post and was replaced in a restructuring as head of U.S. rates strategy by Shyam Rajan, a member of the BofA rates team for six years. William O'Donnell is leaving RBS, and he is expected to join Citigroup as rates strategist in November. RBS says head of strategy John Briggs will assume O'Donnell's duties under his existing role. "The business has definitely changed, and we are the marked individuals," said David Ader, chief Treasury strategist at CRT Capital. Ader said his firm recently changed direction after giving up on becoming a primary dealer, and now Ader's research operation is being asked to fund itself through soft dollar deals and direct sales of its research. UBS confirms that Michael Schumacher has left his position as global head of rates strategy, but it has no comment on what its plans are for a replacement. Treasury desks have seen their business mix change dramatically since the financial crisis. Due to new regulations, firms have become less willing to trade with as much of their own capital. "Treasury desks made money that way, and there was a bid/offer. In this day and age there's less of that going on," Ader said. There has also been a huge change in the mortgage business alone. Treasury desks had done more business hedging convexity in the mortgage market, which was far more active when Fannie Mae and Freddie Mac were holding mortgage securities. The era of low interest rates has also been a general disincentive for trading and hedging, and traders point to the lighter volume, which has shrunk relative to the market size. But some of the lack of activity has also been blamed on the lack of players after a period of downsizing that has resulted in far fewer staffers across the Street. "It's the next lowest hanging fruit. It's an area where it's hard to prove your worth," said a strategist who spoke on condition of anonymity. "Given it's so tight everywhere else, it's now affecting these guys. ... At some point, there won't be a lot of people doing it. ... Ask sales and trading. They know about that." Dick Bove, analyst at Rafferty Capital, said the banks have been cutting back for awhile and the glory days of the primary dealer are gone. "The number of U.S. banks which do this has shrunk from some 40 to seven and the number of the foreign banks that do this has gone from two to 14, so now the issuance of Treasury securities is handled 2-to-1 by foreign banks as opposed to domestic banks," said Bove. "The reason domestic banks got out of the business is you can't make a profit in it, and you do it as a service to the government, expecting the U.S. government to give you some business in return, or because you are providing so much liquidity in the marketplace you get corporate business."
