One of Wall Street's biggest money machines, bond trading, is barely cranking.
This time last year, markets were moving fast, due to President Donald Trump's surprise election victory and the prospect of big corporate tax cuts, a major rollback in regulations, faster economic growth and bigger government deficits. Wall Street brokers raked in commissions and big trading gains as investors scrambled to reshape their bond portfolios.
But this year has seen price swings in bonds and other assets drop to unusually low levels, keeping investors on the sidelines and leaving few opportunities for traders at banks to score gains on big market moves. The effect will be on view starting Friday as JPMorgan Chase & Co. (JPM) , the biggest U.S. bank, posts results for the last three months of 2017 and the full year.
JPMorgan is expected to see fourth-quarter fixed-income trading revenue plunge by 22% from a year earlier, according to analysts at the brokerage firm Keefe, Bruyette & Woods. Goldman Sachs Group Inc. (GS) , historically one of Wall Street's most powerful moneymakers, is expected to see an industry-worst 31% decline, capping an annus horribilis for CEO Lloyd Blankfein that has led some analysts to call for his departure.
The malaise has forced the investment banks to lean on other sources of revenue growth, such as from underwriting initial public offerings and bond sales. But the bond-trading units are such big income sources that the drop is impossible to discount. Theoretically, bond traders at the firms should get smaller bonuses this year, and if market conditions don't improve, layoffs could ensue.
Rival banks probably didn't fare much better in the fourth quarter. Bank of America Corp.'s (BAC) bond-trading revenue probably fell by 21%, while Citigroup Inc.'s (C) dropped by 22% and Morgan Stanley's (MS) lost 25%, according to the KBW analysts.
Many economists and analysts say the unusually low volatility in markets stems from the gushing flow of money pumped into global markets by central banks since the financial crisis of 2008, including so-called quantitative easing efforts by the European Central Bank and Bank of Japan that remain underway. With so much money chasing assets, the reasoning goes, there's little reason to fear a big price drop that ordinarily would spur many investors to trade or hedge their portfolios.
The U.S. Federal Reserve raised interest rates three times last year and is gradually reducing assets - removing cash from the financial system. And while an uptick in the global economy could prompt the ECB and BOJ to taper or curtail some of the monetary stimulus, those decisions could still be far off, according to KBW.
"When central banks pull back stimulus on a global scale, then we should see increased volatility but, for now, we are not at that point and volatility remains low," the KBW analysts wrote.
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