Wall Street banks likely stung again by bad bond-trading quarter
By Lauren Tara LaCapra
NEW YORK (Reuters) - Wall Street banks have had another rough quarter in bond trading thanks to the U.S. Federal Reserve, and it might get worse before it gets better.
Analysts have begun cutting third-quarter profit estimates for banks including Goldman Sachs Group Inc (GS.N: Quote) and Morgan Stanley (MS.N: Quote), citing an industry-wide fixed-income trading revenue decline of 20 to 30 percent compared with a year ago. The quarter's lull has made at least some Wall Street professionals nervous that a fresh round of job cuts may be coming, a trader said.
The third quarter is typically a weak period for banks' trading businesses, but the Fed's decision to keep its program of bond buying intact has hurt trading revenue even more than usual and weighed on the value of the bonds that dealers keep on hand for trading, bankers and analysts said.
Traders in some of the biggest fixed-income markets - including Treasury bonds, mortgage bonds, interest-rate derivatives and foreign exchange - were burned by their wrong assumptions about when the Fed would pull back from its massive bond-buying program. Many investors had expected the Fed to start gradually winding down the program, but instead the central bank in its September 18 policy statement said that it would maintain its $85 billion monthly purchases for the time being.
The decision led investors to hit the brakes on plans to adjust their portfolios, traders and analysts said, and less activity meant less money for banks' fixed-income trading desks.
"From what I can see, it's mainly weaker activity levels - activity levels are just very low," said Richard Ramsden, an analyst who covers banks for Goldman Sachs.
There are already signs of poor third-quarter results.
The investment bank Jefferies Group LLC said earlier this month that its fixed-income trading revenue plunged 88 percent in the three months ended August 31, to $33 million from $266 million a year earlier. Jefferies is not directly comparable to bigger Wall Street banks because of its size and because it reports on a fiscal calendar whose quarters are a month earlier, but the results were still surprisingly poor. Continued...