McGeever@ (The opinions expressed here are those of the author, a columnist for Reuters.)
LONDON, Aug 1 (Reuters) - Q2 was another tough quarter for bond trading at the world's biggest banks, many of whom blame some of the lowest market volatility in a generation and can only wince at Q3 prospects given persistently low vol through July at least.
Earnings reports from 11 of the world's biggest banks show that all bar one saw revenue from fixed income, currencies and commodity (FICC) fall in the three months to June, a period in which implied volatility across equity, bond and currency markets slumped to historic lows.
Only Credit Suisse saw FICC trading revenue rise, but that was by less than 3 percent. Goldman Sachs registered a whopping 40 percent slump, and JP Morgan and UBS both chalked up declines of nearly 20 percent.
As well as lifting trading volumes, higher market volatility typically boosts the hedging activities of bank clients in currencies, cash securities and derivatives. The problem is that there's little sign of that now a third the way through a third quarter that's typically very quiet for trading anyhow.
A running assumption is that volatility must pick up from here because it has been too low for too long and asset market levels and valuations are stretched. As evidence of that, investors poured $5.2 billion into macro hedge funds in Q2, the largest cash injection when compared to other strategies.
Macro funds hoped to profit from market moves triggered by diverging interest rates, shifts in central bank policies and U.S. President Donald Trump's policy agenda. But this largely failed to materialize.
The average level of one-month implied volatility of Wall Street's S&P 500 index in Q2 was 10.5 percent. So far in the current quarter it is 10.3 percent, and on July 26 it hit a record low 8.84 percent.
The VIX has only closed below 10 on 21 days over the last 20 years, but 13 of these were in the past two months, data from JP Morgan showed.
It's a similar story in bonds and currencies. Average one-month implied volatility in U.S. Treasuries was 69.9 percent in Q2 and 7.7 percent in G10 currencies in the three months to June. That has slipped to 51 percent and 7.4 percent, respectively, so far this quarter.
The Federal Reserve is raising interest rates and about to unwind its bond-buying stimulus, and other central banks are making noises that they too may soon follow. A correction in markets and volatility can surely only be a matter of time, so this argument goes.
But that's been the consensus view all year and it hasn't happened yet. Strategists at BlackRock, the world's largest asset manager, have gone against that grain: we're only in the middle of this economic cycle, and data stretching back over a century suggests low volatility can persist for years to come.
If the prospect of a synchronized tightening of global monetary policy, however soft and gradual, is failing to make markets more volatile and unpredictable, there's nothing obvious on the immediate horizon that will.
Strategists at JP Morgan note that as investors accumulate more equity at these record levels they are simultaneously protecting themselves against a possible correction and subsequent spike in volatility via "call" options on the VIX volatility index itself or by buying exchange-traded funds that benefit when volatility spikes up.
As a measure of that, the "call to put" open interest ratio for VIX options is near its record high, JPM showed, with flows into VIX ETFs rising steadily through the year.
Rising volatility is usually good for trading as it spurs more hedging activity. "You don't need an awful lot of volatility to see clients take action to protect their assets," notes Chris Wheeler at Atlantic Securities.
(Reporting by Jamie McGeever; Graphics by Vikram Subhedar and Ritvik Carvalho, editing by Alister Doyle)