Jul 15, 2020 - Economy & Business

Federal Reserve boosted big banks' bond trading profits in Q2

Jerome Powell
Fed chair Jerome Powell. Photo: Federal Reserve via Getty Images

Tuesday's earnings reports showed how banks have reaped the rewards of the Federal Reserve's efforts to carpet bomb markets with liquidity since March.

What happened: JPMorgan's fixed-income trading revenue jumped 99% in the quarter, while fixed-income trading revenue climbed nearly 60% at Citi during the quarter.

  • Goldman Sachs and Morgan Stanley are expected to continue the bond trading bonanza when they report earnings later this week.
  • Wells Fargo's numbers lagged but it has a smaller investment bank and has trailed other banks since its fake account scandal in 2016.

Flashback: The Fed's entrance into the market with the announcement of QEinfinity and its plan to purchase hundreds of billions of dollars worth of corporate bonds led to an unprecedented surge in debt issuance.

  • "The Fed came in with its massive bazooka, addressed the liquidity concerns and it’s gone from a buyer’s market to seller’s market," Mike Collins, senior portfolio manager at Prudential's PGIM Fixed Income, told me in April.
  • "You couldn’t sell a bond before, today you can’t buy a bond."

Catch up quick: "Fees for underwriting blue-chip U.S. company bonds in the first half of the year essentially doubled to more than $7 billion," Bloomberg reported Monday.

  • U.S. companies already have issued more than $1 trillion of investment-grade bonds in just a few months, with the proceeds helping buoy the banks despite putting aside billions for future loan losses.

What to watch: Citi, JPMorgan and Wells Fargo set aside a combined $28 billion in Q2, FT notes, even more than they put aside in Q1 as the coronavirus pandemic first began wreaking havoc on markets.

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