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 Bond trading volume is likely to drop globally in the coming weeks,
after the Fed decided on Thursday to keep rates unchanged. Many
investors are reluctant to take too much risk in bonds and related
derivatives until they have a better sense of when the U.S. central
bank will start hiking rates, traders said.
"The market is queasy, and is not taking bad news well," said
Michael Sobel, managing partner at TruMid, an electronic trading
platform for corporate bonds, and former head of junk bond trading
at Barclays. It is harder to get some trades done, he added.
Weaker bond trading results will weigh on the bottom line at major
banks, which can get as much as a third of their revenue from the
business, and have already been hit by low interest rates and tepid
demand for many kinds of loans. Some analysts already had been
reducing their earnings estimates for banks over the last month. For
Goldman Sachs Group Inc <GS.N>, for example, three analysts have cut
estimates over the last 30 days, by an average of nearly 6 percent.
The quarter was tough for bank trading revenue even before the Fed
announcement. The Greek debt crisis kept many investors out of
markets entirely, and China's slowing growth resulted in the kind of
steep market movements that hurt profits for many traders.
Generally, banks do best when there's a degree of uncertainty, which
spurs investors to reposition their portfolios. But when events
become completely unpredictable, and markets move wildly, trading
volume can dry up, analysts said.
"Banks are getting the bad kind of volatility now," said Charles
Peabody, a veteran banking analyst at Portales Partners in New York.
Chief executives from Citigroup <C.N>, Bank of America Corp <BAC.N>,
and JPMorgan Chase & Co <JPM.N>, speaking at a Barclays conference,
all said this week that their overall trading revenue is likely to
fall by around 5 percent in the current quarter.
Bank of America CEO Brian Moynihan blamed the drop mainly on weaker
bond trading results, which he said were partly offset by stronger
stock trading.
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Jefferies Group, an investment bank that is part of the Leucadia
National Corp <LUK.N> conglomerate, said on Thursday that a measure
of its earnings plunged by nearly 50 percent thanks to slow bond
trading and big writedowns on distressed debt tied to the energy
industry.
Bond trading revenue has been falling at major banks since the
financial crisis, as banks have been barred by regulators from
making big market bets with their own money. Coalition, an
investment banking consulting firm, estimates annual industry
revenue from bond trading at around $70 billion, about half its
level in 2009.
In the last few years, revenue has been stabilizing, and results
from the business still occasionally jump. In the first quarter of
this year, for example, bond trading revenue surged at most major
banks, as the Swiss central bank scrapped a cap on the franc, the
Fed seemed likely to tighten monetary policy soon, and the European
Central Bank announced a quantitative easing program.
Morgan Stanley <MS.N> posted bond trading revenue of $1.9 billion, a
15 percent gain from the same period last year and its highest level
in three years.
But times have changed, and with this week's Fed move, a source at a
major investment bank said his customers are in limbo now.
"There would definitely be more client activity if they had raised
rates," he said.
(Reporting by Olivia Oran and Dan Wilchins in New York, additional
reporting by David Henry in New York, Editing by Christian Plumb)
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