Top 3 Mizuho Global Markets Interview Questions

The world of sales and trading is constantly in flux. In the post great financial crisis era, as we've talked about a number of times, some banks doubled down on their sales and trading business and some pulled back. But over the past few years, as S&T revenues have soared and M&A revenue has fallen, nearly every bank has desperately tried to expand out their sales and trading business.

The way that most have tried to expand out their sales and trading business as quickly as possible has been by poaching traders from other banks -- enticing them with the promise of bigger (guaranteed) compensation and the ability to run their own desk or get a significant title promotion.

While Mizuho is not a household name in the US, for the past few years they've been aggressively expanding their global markets (sales and trading) business outside of Asia. This has included poaching traders from Credit Suisse which is reeling from several scandals and has cut their compensation pool for all employees significantly (thus making many in sales and trading there look for greener pasteurs).

My advice to those looking to break into sales and trading has always been clear: all else being equal, it's better to join a bank that's prioritizing sales and trading than to just go with the bank that has the best brandname.

In recent years, this advice hasn't been as applicable as it was in the 2010s given that nearly all banks are prioritizing growing sales and trading (therefore, it still makes sense to choose the biggest platform and brandname when you have multiple offers). But the point remains that Mizuho is the type of bank you should be very happy receiving an offer from, and one that'll provide significant opportunities to talented junior traders.

Mizuho Global Markets Interview Questions

Given how markets have whipsawed over the past month since my last post, in this post we'll be going through some classic markets questions that can come up in sales and trading interviews (needless to say, you also need to have your behavioral and basic technicals nailed too). 

1. The yield curve is currently inverted which is traditionally a leading indicator of a recession. However, could this time be different?
2. What are the consequences of higher for longer rates on other asset classes?
3. If inflation were to fall back to target, what components of inflation do you think would drive it?

The yield curve is currently inverted which is traditionally a leading indicator of a recession. However, could this time be different?

There are a number of classic leading indicators for future recessions that get a lot of press attention, and none more so than the inversion of the yield curve (the inversion generally proceeds a recession by around a year).

The specific area of the yield curve that many first look for an inversion in is 2s10s, and right now it's as inverted as it has been since 2001 at nearly 90bps!

Note: All we mean by a 2s10s inversion is that the two-year yield is currently higher than the ten-year yield -- which is relatively rare given that you'd expect yields to be higher the further out the yield curve you go (because investors should demand higher yields for higher duration assets). The vast majority of the time, yields are higher the further out the curve you go, thus why yield curves are almost always upward slopping.

Here's a long view of when 2s10s inversions have occurred since the great financial crisis...

Needless to say, there's no strict reason why a yield curve inversion must proceed a recession (in other words, it's not a foregone conclusion that a recession must follow 2s10s becoming inverted).

When an inversion occurs in the yield curve it's because the market is anticipating that future negative economic developments are going to require that rates be cut -- so while the short-end of the curve (2s) are more reflecting the current reality of being in a high rates environment, the belly of the curve (10s) is reflecting what will be happening in the medium term (lower rates from where we are now). 

However, this time is a bit different. When past inversions have occurred the ten-year has been significantly lower than where it is now and firmly below the neutral rate. This time the yield curve inversion is just signalling that short-end yields are going to have to come down from their currently "restrictive" levels to a more normalized level.

For example, the ten-year is currently around 3.80% and the two-year is a little under 4.70%. Relative to the past twenty years, both of these yields are high! So maybe the yield curve is portending a recession but it's equally viable that it's just communicating that longer-run rates aren't going to be as high as they are now. Instead, the inversion is really saying that rates will return to around a more normalized (less restrictive) level.

This is why some banks - like Goldman - are undeterred by the 2s10s inversion and are still saying there's only a 30% of a recession occurring. GS believes, and the market increasingly agrees with them, that the US can sidestep a recession and have anemic growth this year, have inflation fall back down to target, and then the Fed can begin lowering rates a bit (without reigniting inflation again) to get to a more normalized growth path in the years to come.

What are the consequences of higher for longer rates on other asset classes?

The past few weeks have seen a narrative shift: from the anticipation of a recession in the latter part of the year and the Fed cutting rates a few times before the beginning of 2024, to the economy remaining relatively strong and rates remaining higher for longer (as of this writing, there are suddenly no rate cuts priced in at all for 2023).

The rise in yields across the curve over the past few weeks - including the repricing of the terminal rate to well over 5.0% - from a more theoretical perspective should have a few consequences.

First, higher rates for longer should strengthen the dollar relative to other developed market currencies as a larger rates differential opens up. Second, higher rates for longer should lower equity prices as the rate you're discounting a company's future cash flows by goes up and as other investments (i.e., holding t-bills that are currently yielding nearly 5.0%) suddenly offer an enticing relative return when adjusting for risk.

But, of course, it's never a given that that an asset class will respond to a certain development (i.e., higher yields) in a predictable way over the short term. This is why many strategists (i.e., Mike Wilson over at Morgan Stanley) have been a bit flustered by the equities rally we've seen over the past month despite relatively bad earnings and rates that have started to march back up to their 2022 highs.

Here's how a recent sell-side note from JPM describes the baffling fact that equities have remained resilient despite yields having moved sharply upwards in recent weeks: "How big is this bond-equity divergence? The move in 2y rates since the Fed meeting should result in a ~5-10% sell-off in Nasdaq, which is actually up ~3% since, and for high-beta tech the divergence is much larger. [...] this divergence cannot go much further..."

In an interview, you aren't ever going to be expected to give a long dissertation on how asset classes are going to precisely move relative to others (as the JPM note makes clear, no one knows with any certainty!).

However, there are general rules of thumb (i.e., higher rates are, all else being equal, going to be a negative for equities). So that's the kind of thing you should try to articulate in your answer.

If inflation were to fall back to target, what components of inflation do you think would drive it?

With just how elevated inflation has been recently, inflation returning to target won't involve all components of inflation magically deflating back down to the target inflation rate of 2%.

Instead, we're going to have some components of inflation (e.g., used cars) deflate heavily while other components will likely continue to show above target levels of inflation.

But the hope of many is that the deflationary impulses from certain components are enough to overcome those components that are still seeing significant price increases, and that eventually we get back to target when you average it all out. It'll be a bumpy ride.

Whenever you're asked about inflation, you should just think about CPI (even though other measures of inflation like PCE are closely watched). More specifically, you should think about Core CPI and Headline CPI, with Core CPI simply excluding energy and food pricing (as those are always volatile, and were even in the pre-pandemic era!).

What market participants care most about is Core CPI (although, obviously, energy price shocks are important and can feed into Core CPI components). Within Core CPI you have Core Goods (the primary components being new and used cars, apparel, household furnishings, etc.) and Core Services (the primary components being shelter, medical care services, transportation services, recreational services, etc.).

When inflation first began rising significantly above target, it was Core Goods that led the way. Then Core Services followed after as Core Goods inflation began to moderate. Today, as inflation begins to fall modestly, we're seeing very little Core Goods inflation (last month there was even modest deflation) but Core Services inflation is remaining stubbornly persistent.

To get inflation back to target it's assumed by most that we need to have very little inflation in Core Goods or even deflation. The reason being that it's assumed Core Services is going to remain relatively sticky at elevated levels (i.e., 3.5-5.5%).

This is something that Chair Powell has said he's paying particular attention to. In fact, he's frequently cited that he's looking at Core Services ex. Shelter to see if core services inflation outside of just housing is cooling or remaining elevated, as having Core Services ex. Shelter remain extremely strong, despite deflationary impulses in other components, could still provide a rationale for raising rates significantly more.

When answering this question in an interview, your actual answer matters less than how you're presenting it. What you should do is layout that while Core Goods inflation is already below target, given how persistent Core Services inflation is we'll need a significant and continued deflationary pulse from Core Goods to get back to target overall.

Alternatively, if there's enough of an economic slowdown that it impacts the demand for things within Core Services (i.e., vacations, etc.) then perhaps that could allow us to return back to something approximating target inflation (2%) within the next year or two.

In the end, no one expects you to have an overly strong view. If you can incorporate into your answer that you know there's been very little inflation (even deflation) in Core Goods, and that Core Services ex. Housing is really the issue with inflation's persistence today, then that'll be highly impressive.

Conclusion

It's clear that Mizuho is committed to expanding their sales and trading franchise and building off of their historic strength in Japanese Government Bond (JGB) trading. It's also always a great sign when you see a bank aggressively poaching traders from other banks in order to expand marketshare.

So if you have an interview for Mizuho coming up, don't be deterred at all by their lack of brandname in the US. It's a really interesting place to land that is trying to grow quite quickly.

If you're currently getting ready for interviews, be sure to not only focus on being able to talk about current market themes, like I've done in this post, but also the other types of traditional sales and trading interview questions that'll come up. I've also put together a little primer on sales and trading that may be helpful to read, as it'll give you a lay of the land (Mizuho has both a fixed income and equities business in the US).