Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

Fixed-income trading is causing a split on Wall Street.

While some banks are retreating from the business, Goldman Sachs is doubling down. It has been successful so far, at least as measured by its activities managing the most-lucrative corporate-debt sales.

The bank gained market share across the board in 2015. It became the third most-active U.S. junk-bond underwriter -- its highest annual rank since 2003 -- and fourth most-active manager of new leveraged-loan sales in the region, according to data compiled by Bloomberg that excluded self-led sales. It’s moving up the ranks in shepherding debt sales in Europe, the Middle East and Africa.

Grabbing Bond Business
Goldman Sachs has gained market share in underwriting riskier corporate debt.
Source: Bloomberg

Now Goldman must face another more fundamental question: Is it worth it?

Diverging Paths
Goldman Sachs has held steady even as peers, such as Morgan Stanley, cut staff.
Source: Bloomberg, SEC filings

For some banks, such as Morgan Stanley, the answer is maybe not. Morgan Stanley cut about 25 percent of its fixed-income staff last year as it questioned whether the debt industry would ever return to its former profitability. It thinks the overall pool of debt-related profits may shrink in the face of new regulations and more automation.

In contrast, Goldman has been vocal about its commitment to debt brokering and banking, even after suffering a bigger drop in trading revenue than its rivals in the third quarter of 2015.

Banks that manage debt sales enjoy benefits beyond just fees, which can be quite hefty in their own right. They typically profit from an increase in trading activity around each debt sale, and they often get a leg up in the race to manage corporate mergers and acquisitions.

It’s true that a greater share of debt trading is migrating to electronic marketplaces and that high-frequency traders are stealing more of the profits tied to exploiting small differentials between markets. But there’s still a lot of money to be made trading debt.

Greenwich Associates predicts that debt trading will soon become more profitable for dealers as traders stop obsessing over when the Federal Reserve will raise rates -- because it already has -- and volatility picks up, according to a report from the market research firm distributed this week.

There’s a catch with the increased financial rewards, of course: increased risk. Unless Goldman moves to a pure agency model, in which traders simply match buyers and sellers without using the bank’s money, there’s going to be the potential for losses, even as new regulations limit how long traders can hold certain positions and the types of securities they can own.

Goldman is conquering territory it set out to win. Soon it will find out whether it has been a battle worth fighting in the first place.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net