Traders signal offers in the Ten-Year Treasury Note Options pit at the Chicago Board of Trade.
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Wall Street firms just posted the biggest surge to bond-trading revenue in years, helping several banks break records for annual profit — but don’t expect the party to last.
Morgan Stanley said earlier Thursday that its fixed income division – a chronic underperformer a few years ago – posted a 126% surge in fourth-quarter revenue to $1.27 billion. At J.P. Morgan Chase, bond trading revenue rose 86% to $3.4 billion, exceeding estimates by $800 million. Goldman Sachs and Citigroup also handily beat expectations.
But the good times are probably fleeting. For one, the rebound happened because business had been exceptionally lousy a year ago, making the year-over-year comparison easier. In late 2018, spikes in volatility across asset classes caused institutional clients to stay on the sidelines, and even mighty J.P. Morgan posted its worst bond-trading results in a decade.
“It was a good year for fixed income traders off the back of some very challenging years,” said David McCormack, head of recruitment firm DMC Partners. “Guys who had been exceptionally well paid have seen their compensation come down for a decade as the business has declined.”
Bond traders were once the kings of Wall Street, taking home multi-million dollar paydays by placing huge and risky bets with house money. Their exploits were detailed in books from the Bonfire of the Vanities in the 1980s to the more recent The Big Short.
But then the financial crisis happened, spurred in part by out-of-control risk taking at banks, and new rules tamped down on the industry’s hedge fund-like bets. Central banks around the world drained volatility from markets and big hedge funds struggled to beat index funds, closing shop and shrinking the roster of bank clients.
Fixed income trading, which includes corporate and sovereign bonds, mortgages, currencies and commodities, is still the biggest single business on Wall Street. But it’s been in a long decline, and one good quarter is unlikely to change that. The biggest global investment banks generated $64 billion in fixed income revenue in 2018, less than half the 2009 haul, according to financial research firm Coalition.
The fixed-income realm has also been more resistant to automation when compared to stocks, a fact that will likely change at some point. For instance, XTX Markets, a tiny London-based algorithmic trading firm, has come from nowhere to become a major player in currency trading.
“I don’t think it’s going to come back to the way it was, with all these guys making $5 million, $6 million dollars a year,” McCormack said.