Bond trading, that juggernaut of Wall Street revenue and bonuses, is back. Sort of.
The largest U.S. banks, led by JPMorgan Chase (JPM) - Get Report on Friday, probably will report a 23% jump in third-quarter revenue from trading bonds, currencies and commodities, Goldman Sachs analysts predict. Such an increase would dwarf growth in lending income and securities-underwriting fees, while stock-trading revenue probably fell by 5% from a year earlier.
Fixed-income-trading volumes have jumped in recent months as the U.S. Federal Reserve delayed interest-rate hikes until later this year, encouraging more investors to buy and sell U.S. Treasuries and spurring a rally in corporate bonds along with other risky assets. Gains from the business are helping JPMorgan, Citigroup and Bank of America offset historically low lending margins, also partly due to the Fed's inaction.
But Wall Street's fixed-income revenue remains well below levels reached as markets rebounded following the financial crisis, since tougher banking regulations have pushed firms to exit risky trading businesses that also tended to be the most lucrative. So while bond traders' bonuses look set to increase this year, the checks will be nowhere near levels from the glory days, says Jeanne Branthover, a partner specializing in banks at recruiting firm DHR International in New York.
"This is the time that the firms start looking at what they're going to do on compensation, and compared to last year, things are looking much, much better," Branthover said. "Bonuses are never going to be anything like they were in pre-2007."
The third quarter of 2015 was racked by market turmoil, as China announced major changes to its foreign-exchange policy and crude prices swooned, sparking fears of mass bankruptcies among oil companies.
Among the biggest Wall Street trading firms, Morgan Stanley (MS) - Get Report is due for the largest jump in third-quarter fixed-income trading revenue, at 72%, according to Deutsche Bank analysts. The increase is partly because the New York-based firm posted such abysmal results in the third quarter of 2015.
Compare those figures with the 4.2% projected growth in net interest income -- the difference between what banks pay out in interest on deposits and other funding and what they collect on loans. Interest income is the key contributor to revenue in traditional banking businesses.
Investment-banking fees are set to drop by 5% in the quarter, partly because of a slowdown in mergers and acquisitions.
"M&A continues to be weak, as CEO confidence continues to drag and policy uncertainty remains high," Goldman analyst Richard Ramsden wrote in an Oct. 5 report.
If third-quarter bond-trading results come in as projected, year-to-date revenue from that business would climb past levels reported for the first nine months of 2015.
Yet the comparison represents a low bar: The five big Wall Street firms generated a combined $38.6 billion of revenue from fixed-income trading in 2015, down from $50.1 billion in 2010.