• Fixed-income is driving BofA's decline, CEO Moynihan Says
  • Jefferies posts 50% drop in trading revenue in its quarter

Wall Street banks have had a rough third quarter for trading so far. The Federal Reserve is about to determine what the period’s final two weeks will look like.

Bank of America Corp. and Citigroup Inc. said this week they’re expecting a 5 percent drop in trading revenue after markets turned volatile in late August. Bank of America’s decline is driven by fixed-income, with equities on track for an increase, Chief Executive Officer Brian Moynihan said Thursday.

The biggest U.S. banks generated the largest increase in first-half trading revenue in six years, as equities gains offset the sixth straight decline in the fixed-income business. Whether that momentum continues probably will depend on how investors react to the Fed’s 2 p.m. announcement on whether it will raise interest rates for the first time in almost a decade.

“When it comes to trading, two weeks can be a long time,” Jeff Harte, an analyst at Sandler O’Neill & Partners LP, said in an interview. “If you get something that goes with or against what people are thinking out there, it can make a big difference.”

The five largest Wall Street firms -- JPMorgan Chase & Co., Bank of America, Citigroup, Goldman Sachs Group Inc. and Morgan Stanley -- generated $73.7 billion from trading last year, with about two-thirds of that coming from the fixed-income units and one-third from equities. The total was down from $88.7 billion in 2010, with substantially all of the decline coming in fixed-income, according to data from Bloomberg Intelligence.

Jefferies Group, the investment bank whose third quarter ended Aug. 31, reported trading revenue on Thursday that tumbled 50 percent on losses tied to distressed debt of energy companies. The firm’s fixed-income trading plunged to negative $18.2 million, compared with $195 million in revenue a year earlier.

Credit spreads widened and bond issuance fell in August, probably hurting banks’ credit-trading businesses, while the volatility may have helped volume in the rates and currencies units, Matt O’Connor, an analyst at Deutsche Bank AG, wrote in a research note last month.

Banks may see additional volume as investors adjust their bond portfolios in the wake of the Fed’s decision. Futures markets imply a 30 percent chance the Fed raises its benchmark rate, after the probability climbed to more than 50 percent in early August.

“Fixed income is down,” Moynihan said Thursday. “The real question is, as we get by today, what really happens the next couple of weeks. You could move that positively or negatively.”

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