Even after a good quarter, optimism is hard to find on Wall Street's bond trading floors. Revenue from fixed income, currency and commodities trading at the five biggest US banks rose 21 percent to $13.1 billion in the second quarter from a year earlier, Reuters calculated from their reported results.
The banks benefited from Britain's surprise vote to leave the European Union, which rippled across global markets and led to record currency volumes for some big banks. But executives say that bump in activity was short-lived. Although markets have not ground to a halt, activity so far in the third quarter has not been robust. Some upcoming monetary policy decisions may spur more action, but Wall Street is unsure that this will be a turnaround year for bond trading.
"We aren't buying into it just yet," said Keefe, Bruyette & Woods analyst Brian Kleinhanzl. "The environment is fragile because if there is just one negative event, investors will move to the sidelines." Apart from an odd quarter here and there, top bankers have watched bond trading revenue grind lower for about seven years, partly because investors have been parked on those sidelines. Also, new regulations on proprietary trading, derivatives and capital have restricted what banks can do in bond markets, making the business less lucrative.
From 2009 to 2015, annual revenue from bond trading at J.P. Morgan Chase & Co, Citigroup Inc, Goldman Sachs Group Inc, Bank of America Corp and Morgan Stanley dropped 44 percent to $34 billion. Those banks' results through the second quarter show bond trading down slightly for the first half of 2016. "There's been lots of adjustment in the fixed-income industry over the past several years," Thomas Hartnett, Mizuho's head of fixed income sales and trading, said in an interview. "Fortunately, this gives us a clearer picture of the 'new normal.'"
Trading volumes could get a lift this summer from a much-anticipated Bank of England meeting or from actions by Japan's central bank to spur that nation's economy. But on conference calls to discuss second-quarter results, senior bank executives largely shied away from making predictions about fixed income markets' resilience in the second half of the year. In fact, even though the Brexit vote provided a momentary boon for trading, such an event is what spooks investors in the first place, said Goldman Chief Financial Officer Harvey Schwartz.