Top 4 Wells Fargo Sales and Trading Interview Questions
Wells Fargo is one of the last remaining investment banks that I haven't created a dedicated post for. While they have a bit of a unique sales and trading operation - in particular, due to their presence in Charolette along with New York - they still take a relatively healthy class size and will get you strong exposure.
If you've read other posts on here then you know that I normally try to go through a number of different types of questions in these posts (i.e., market-based questions, technicals, behaviorals, etc).
However, given the amount of turmoil in markets recently, this post will be dedicated to walking through some of the more timely questions that you could get in an interview on what's driving markets right now.
In particular, we'll focus in on the world of rates. Because the reality is that rates haven't been this volatile or uncertain since at least the Great Financial Crisis. However, during the Great Financial Crisis there was at least a relatively coherent and consistent narrative around the pathway for rates (although there was a great deal of argument and controversy around what QE1 would do to the rates market given its novelty and how credible Bernanke's forward guidance was).
Further, the volatility in rates is having knock-on ramifications on all asset classes. Indeed, it's overstated - but only slightly so - to say that nearly every asset class is moving, sometimes quite violently, whenever a Fed member opens their mouth.
So, given just how unique the current environment is, let's go talk through why this is the case and what you should be thinking about for interview purposes.
Note: Since it's impossible to update every post as market conditions change, I've started writing a weekly newsletter that takes a deep dive into what stories are moving markets most -- usually by discussing my favorite sell-side research. Every Sunday's newsletter will usually take 25-35 minutes to read entirely, and the first part will always be entirely free to read. The newsletter is called Market Making, and I hope you check it out. My hope is that it can provide a more granular level of insight for those who are deeply interested in markets from an institutional perspective.
Wells Fargo Sales and Trading Interview Questions
Below are some interview style questions around current market dynamics in rates. You can use the links below to go to each question.
Several months ago I highlighted that 2s10s - meaning the spread between the two-year and the ten-year treasury - was flirting with inversion. At the time, I mentioned that this is often a precursor to a recession as the market is anticipating a lower rates environment in the future (thus why the front-end of the curve is still elevated relative to the belly of the curve).
You should think about a 2s10s inversion as not being a direct cause of a future recession, but rather as being an illustration of the fact that the market anticipates macroeconomic conditions in the future will necessitate yields coming down. Indeed, the market is already signalling that they anticipate the Fed will need to enter into a cutting cycle in Q1 of 2023 with a full rate cut (25bps) now being fully priced in.
So, in other words, the market is anticipating that the Fed continues to hike until the December meeting, then due to continued deterioration in the economy will need to begin immediately cutting.
Since the last time I wrote about the yield curve, 2s10s has inverted to its most negative level since the early 2000s -- surpassing even the level seen in the run up to the Great Financial Crisis. Currently, 2s10s stands at around negative 30bps and you can keep track of where it goes on the St. Louis Fed's website.
Importantly, while a 2s10s yield curve inversion has proceeded every recession since the 70s, the duration and magnitude of the inversion matters. Right now we do have the magnitude, but the inversion is still relatively short-lived.
Further, even though 2s10s has been a good predictor for past recessions, you can certainly imagine scenarios in which it would give off a false signal. For example, if we suddenly enter into a period of robust economic growth mixed with cooling of inflation due to continued commodity declines - which, admittedly, is hard to imagine! - then you can imagine the yield curve regaining a positive slope and the economy skirting a recession.
If a "soft landing" could be engineered by the Fed, what would you expect to happen to the yield curve?
If you've been following markets over the past few months, you've likely heard the term "soft landing" many, many times. This is a favorite term of Fed members and refers to their desire to slow the economy down, in order to slow inflation, while not slowing it down so much as to cause a recession. If this sounds like a difficult task, that's because it is! Recently Chair Powell has recognized this and noted that the pathway for achieving a soft landing has become narrower.
While many castigate the notion that a so-called "soft landing" can be achieved, it's still the baseline scenario of many banks (and has prominent proponents including Jan Hatzius, the Chief economist of Goldman).
Note: In interviews it's important to have a general idea of how the bank's economists think macroeconomic conditions will unfold. There's no need to give the same view as them in an interview, but you don't want to go into GS saying that a soft-landing is nonsensical when Jan's view is that it is perfectly sensical.
Anyway, this would be a really interesting interview question as it gets to whether you have a general understanding of yield curve dynamics without getting into too much technical minutia.
So if a soft landing is achieved, as the Fed is hoping for, then you'd likely anticipate the yield curve to probably stay quite inverted in the near-term. You'd expect the Fed to keep raising rates modestly - as the dot plots have indicated - to bring down inflation. Then once progress appears to have been made you'd expect them to pause while keeping rates stable or perhaps doing a few modest cuts to support a very modest amount of growth (but not too much as to stoke inflation again).
When it comes to the belly of the curve, it would likely stay lower than the front-end of the curve in anticipation of cuts in the future to stimulate a bit more growth and keep the economy from falling into recession. Or, alternatively, if the economy is humming along despite the higher short-term rates then the belly of the curve may "re-inflate" and the yield curve may become quite flat -- reflecting being in a higher rates environment for a longer period of time (i.e., rates being at ~3% becoming the new normal and being the right level for a moderately growing economy with full employment and inflation around target range).
The key to this question would be knowing that you wouldn't anticipate a steep yield curve to eventuate in a soft landing, as a soft landing is predicated on very moderate or slow growth easing inflationary pressures and no drastic rate cuts occurring after inflation has begun to fall (as that could cause inflation to reemerge).
While the Fed doesn't give a listing of economic indicators they're watching - or how exactly those indicators fit into their personal framework for making decisions - frequently Fed members will reference indicators they've been thinking about and that have helped to support their decisions to vote a certain way.
For example, significant headlines were made in June when Chair Powell referenced the University of Michigan inflation expectations survey as one of the reasons for making an aggressive hike (surprising and raising questions among some due to how small of a sample it surveys).
Another common inflation measure - much more closely watched by market participants - are the 5Y5Y breakevens.
When it comes to measuring current inflation levels, the popular press tends to focus primarily on CPI and core CPI, the latter of which strips away volatile food and gas inflation (although, under our current situation, those are certainly relevant given just how much they've risen and how sticky they appear to be).
However, the Fed's favored measure of current inflation is the Personal Consumption Expenditures (PCE) index, which measures the changes in prices for goods and services that consumers are purchasing and tends to be lower than CPI.
With that said, the Fed still pays careful attention to CPI since it is the most frequently cited inflation index, informs TIPS, etc. But what the Fed tends to focus on most is not the "headline" rate, but rather the month-over-month momentum in inflation and how sticky components of the CPI basket appear to be.
For example, if the headline CPI is quite high, but it's being driven by just one component that has seen a large run up in price due to supply chain issue, etc. then that's not too much concern to the Fed. However, currently nearly 75% of the components of the CPI basket are inflating at over 4%, which shows a broad-based nature to the current inflation that we're currently seeing and is no doubt deeply concerning to the Fed.
Over the past month we've seen a significant reversal in yields across the belly and long-end of the yield curve in anticipation of the Fed needing to pivot their hawkishness in the face of deteriorating economic conditions.
In fact, over just the past month yields on the ten-year have dropped over 75bps. This is why - in conjunction with the two-year yield rising modestly - we've seen such a sudden and relatively deep inversion of the 2s10s curve.
Among hedge funds, buying up the ten-year has become an incredibly popular trade, although some are beginning to waver and take profits as the ten-year slides to a yield of just 2.7%.
So, given current market dynamics, there are two basic ways you could think about answering where you see the ten-year going. If you think, as many hedge funds currently do, that the Fed is going to have to capitulate earlier than many anticipate and begin cutting rates next year in the face of deteriorating economic conditions then this trade probably still has legs (i.e., yields can continue to fall, and the price of the ten-year can continue to climb).
However, if you think that the Fed will remain persistent regardless of economic conditions due to the stickiness of inflation and the desire of the Fed to see inflation come down significantly before pivoting, then you'd want to take the other side of the bet (i.e., selling the ten-year in a bet on rising yields and falling prices).
Of course, you could get more creative in your structuring of any trade involving the ten-year (i.e., doing a relative value yield curve trade, doing a futures trade instead, etc.). However, for interview purposes you'll highly impress by just showing that you understand the basic dynamics at play (i.e., what a reasonable rationale would be for the ten-year going up or down from where it currently is).
Right now we're living through an incredibly tumultuous time in the world of rates with volatile movements reflecting the uncertainty among market participants as to just how persistent inflation will be and how resilient the economy really is.
With that said, it's important to keep in mind that interviewers will be incredibly impressed to just see that you understand general market themes and can articulate them relatively coherently.
So don't worry about needing to have a perfectly cohesive mental model for thinking through rates movements -- the reality is many people who have spent decades in rates are rethinking their own mental models these days.
Further, keep in mind that through the course and these posts I try to go one or two layer deeper than will be anticipated by interviewers -- this way you can really stand out during the interview process.
Hopefully this post has been helpful. If you haven't yet, be sure to look at the longer list of sales and trading interview questions I put together. Also, there's the sales and trading primer that gives you a solid overview of the way sales and trading works, and the sales and trading guides if you're looking for even more.