(Reuters) - 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 U.S. 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 JPMorgan Chase & Co (JPM.N), Citigroup Inc (C.N), Goldman Sachs Group Inc (GS.N), Bank of America Corp (BAC.N) and Morgan Stanley (MS.N) 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.
“The violence of the first quarter ... and the concerns about Brexit in the second quarter – I think it’s fair for us to say we feel like these are the types of factors that contribute to reduced client sentiment,” he said. “They reduced confidence, and as a result they reduce activity.”
Goldman cut bond trading staff in the first half of the year as part of a broader effort to reduce annual expenses by $700 million.
Morgan Stanley CFO Jon Pruzan said in an interview on Wednesday that although it was too early to tell how Brexit would ultimately affect trading, “all this uncertainty generally leads to lower levels of confidence and activity.”
Analysts are cautious in their forecasts for bond-trading revenue, saying the business remains challenged and will almost certainly never return to its glory days.
“This quarter was comparatively better but it wasn’t resounding,” said Justin Fuller, a senior director at Fitch Ratings who focuses on bank stocks. “Trading is still largely episodic.”
Reporting by Olivia Oran in New York; Additional repoting by Dan Freed in New York and Anjuli Davies in London; Editing by Lauren Tara LaCapra and Lisa Von Ahn