Wall Street banks' bond trading revenue hit by market volatility, equities shine

Wall Street banks reported weaker fixed-income trading revenues in the third quarter as a sharp selloff in the bond market and heightened interest rate volatility dampened client activity, while equities trading delivered strong growth, Reuters reported.

According to Reuters, Treasury yields climbed to multi-decade highs during the quarter, and abrupt market moves prompted investors to reassess their expectations for the future path of interest rates. The benchmark 10-year US Treasury yield recorded its biggest quarterly increase since 2009 by the end of September.

Morgan Stanley's revenue from fixed income, currencies and commodities (FICC) trading fell 7% from a year earlier. JPMorgan Chase reported a 4% decline, while Bank of America recorded a 17% drop. Goldman Sachs' FICC trading revenue was flat, while Citigroup bucked the trend with a 4% increase.


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The sharp rise in interest rates weighed on demand for structured transactions, while widening credit spreads created additional challenges for investors holding bond portfolios. Morgan Stanley Chief Financial Officer Sharon Yeshaya said the rapid increase in interest rates during the third quarter was unexpected compared with market expectations at the end of the previous quarter, Reuters reported.

Bank of America Chief Financial Officer Alastair Borthwick also cited reduced client activity and changing market conditions, including a significant shift in interest rates, as factors affecting the bank's fixed-income businesses, particularly credit, mortgages and municipal securities.

At Citigroup, most of the 4% growth in FICC trading revenue came from foreign exchange and spread products. Chief Executive Officer Jane Fraser said the trading environment pressured interest rate revenue, while foreign exchange and spread products delivered growth and provided relatively stable revenue streams.

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Rising yields increase banks' unrealised losses
The bond market selloff also affected banks' balance sheets by increasing unrealised losses on securities portfolios as yields climbed.

Bank of America's unrealised losses on mortgage-backed securities, US Treasury securities and government-agency bonds rose to $109 billion in the quarter ended September, from $85 billion at the end of June.

Most of these securities were classified as held-to-maturity assets, which the bank does not intend to sell. Such losses generally remain unrealised unless the securities are sold, although their accounting and capital implications depend on the classification of the assets and applicable rules, Reuters reported.

Equities trading delivers strong growth
The weakness in fixed-income trading contrasted sharply with the performance of equities desks, which reported substantial revenue gains during the quarter.

Goldman Sachs recorded a 72% increase in equity trading revenue, supported by stronger derivatives and financing activity. Morgan Stanley's equity trading revenue rose 41%, while JPMorgan's increased 49%, Reuters reported.

Bank of America and Citigroup posted more modest gains of 11% and 14%, respectively.

However, strong equity trading has also raised questions about the sustainability of banks' revenue growth, given financial market volatility.

Oppenheimer analyst Chris Kotowski warned that banks could face risks if they become too reliant on equity trading revenues, which can fluctuate sharply with market conditions, Reuters reported.

The divergent performance of fixed-income and equities trading highlights the challenges facing Wall Street banks as shifting interest rate expectations reshape market activity. While equity desks benefited from strong trading conditions, the bond market selloff weighed on fixed-income revenues and increased pressure on securities portfolios.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)