Jan 18, 2019

The slow decline of big bank bond-trading

Data: Company annual filings; Chart: Naema Ahmed/Axios
Data: Company annual filings; Chart: Naema Ahmed/Axios

On various earnings calls this week, CEOs explained lackluster results from their fixed-income trading business like this: volatility kept clients on the sidelines, dragging down their bond trading businesses.

The big picture: Fixed-income trading revenue has been slowing for years, Axios' analysis of annual filings shows.

  • Total fixed income revenue at the big banks this year was $43 billion. It was $50 billion in 2016, and $61 billion in 2010.

By the numbers:

  • J.P. Morgan's fixed income trading desk had the worst quarter since 2008.
  • Citi's bond-trading revenue hit a 7-year low.
  • Goldman Sachs' bond trading business slumped 18%.
  • Morgan Stanley fared the worst: its fixed income business plunged 30% from a year earlier.

What's going on: "The nature of the market has changed," Dick Bove, an analyst at Rafferty Capital Markets, tells Axios. "You're not doing these wild issuances that were very common prior to 2008."

  • Additionally, "there's been this shift in pricing," Bove said. "No one is going to pay you a higher commission for trading a AAA bond."

Yes but: With more market volatility, the Federal Reserve reducing its $4 trillion bond holdings and a slowing global economy, some expect bonds to be back en vogue.

  • "There's going to be more debt issuance, not less," Barclays analyst Jason Goldberg tells Axios. "There's going to be more need to hedge [with bonds], not less."

What they're saying:

  • Morgan Stanley CEO James Gorman: "The weakness [in fixed income] was driven by both credit and macro. Both seasonal factors and increased economic uncertainty related to growth and rate outlooks for 2019 and beyond influenced markets resulting in rapid movements in spreads and asset prices."
  • Citigroup CEO Michael Corbat: "We saw basically that extreme volatility, given the overall lack of a view of where rates would finally bottom out, just impact every one of our businesses in fixed income."
  • Bank of America CFO Paul Donofrio: "[Fixed income trading]'s lower revenue was due to weakness in credit and mortgage markets and lower client activity in credit products."
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