Updated from 9:17 a.m. EST

A thriving bond market came to the rescue of three big Wall Street firms in the first quarter, but investors -- their attentions fixed overseas -- seemed not to notice Thursday.

Shares of

Goldman Sachs

(GS) - Get Report


Lehman Brothers



Morgan Stanley


, all of which reported better-than-expected first-quarter profits, were either down slightly or flat in midday trading. The best-performing stock in the group was Morgan Stanley, which most analysts had expected to report weak earnings. It rose 52 cents, or 1.3%, to $40.

The tepid trading reflected a combination of a war nerves and concern that the strong bond-trading revenue will be hard to sustain.

Whatever the response, there's no denying Wall Street showed it's possible to make a great deal of money even in a brutal bear market. That is, as long as you have a strong bond and commodities trading desk.

Still, Wall Street executives were quick to caution that it may be hard to duplicate the big revenue gains in fixed-income trading. They also noted that the weak economy and war in Iraq make the outlook for a revival in retail stock trading and traditional lines of investment banking work look murky at best.

"Our visible pipeline of

investment banking business is no stronger than it was three months ago," said Morgan Stanley Chief Financial Officer Stephen Crawford in a conference call. "The value of advice is high but the activity is slow."

Meanwhile, Lehman officials said that, at best, they are looking for a "modest economic recovery in 2003 and the firm remains concerned about the impact of "heightened global risks" on investor confidence.

Of the three banks reporting Thursday, Goldman, the premier Wall Street investment bank, did the best. Its first-quarter profits rose 26% to $662 million, or $1.29 a share. A year ago, Goldman earned 98 cents a share. Most Wall Street analysts were expecting it to post similar earnings again this year.

Goldman's strong quarter was fueled by a 54% gain in revenue from fixed-income and commodities trading. The $2.1 billion the firm took in from trading helped offset a 20% slide in investment banking revenue. In the quarter, Goldman generated $718 million in fees from merger advisory work and stock and bond underwriting.

Still, Goldman's investment banking backlog declined during the quarter, meaning the potential for new corporate deals in the future remains thin.

Morgan Stanley reported $905 million in net income, a 7% gain over a year ago, for earnings of 82 cents a share. Last year, the firm earned 76 cents a share. The Thomson Financial/First Call consensus estimate had been for Morgan Stanley to earn 62 cents a share.

Lehman, on the strength of its bond trading operation, reported a 1% gain in first-quarter profits to $301 million. It earned $1.15 a share, a big improvement over a year ago, when it earned 99 cents a share. The first-quarter number handily beat the Thomson Financial/First Call consensus estimate of 98 cents a share.

Morgan Stanley's results, however, were far better than anyone expected. Many Wall Street watchers had anticipated Morgan Stanley to report slightly lower profits because it is seen as more dependent on stock trading by individual investors than either Goldman or Lehman.

But the bank defied the experts by the registering $1.7 billion in net revenue from fixed-income sales and trading -- a 48% gain. The firm's institutional securities division, which includes fixed-income trading, accounted for 68% of the firm's net profits in the quarter.

The gains in bond and commodity trading at the firms helped offset particularly weak numbers in corporate merger advisory work and stock underwriting.

On Wednesday,

Bear Stearns


showed just how profitable bond and commodities trading can be for an investment firm that does it right, even in the midst of a brutal bear market for stocks.

Bear recorded a 52% gain in first-quarter profits, largely due to the strength of its bond trading and bond underwriting work. The New York-based firm, which counts bond trading as one of its staple businesses, recorded big revenue gains in trading mortgage-backed securities and underwriting municipal bonds.

But on the equity side of the business, things remain awfully weak for Wall Street. And there's concern that investor interest in buying stocks and the demand for new stock offerings could remain in hibernation with the nation now at war in Iraq.

Indeed, Morgan Stanley's individual investor group reported a $1 million net loss, a decline of 114% from a year ago, because of diminished interest of retail investors in the stock market.