Markets

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

Rani Molla is a Bloomberg Gadfly columnist using data visualizations to cover corporations and markets. She previously worked for the Wall Street Journal.

Goldman Sachs is patiently waiting for a time when debt trading becomes more profitable again. But it's unclear when and if the perfect fixed-income conditions will ever arrive, or what they'll look like.

The New York bank keeps reiterating its commitment to fixed income despite the unit's steadily declining revenue and new regulations that crimp potential debt profits in the future.

Its top executives noted last week that "cycles do turn, even if the timing of such inflections may be difficult to predict," according to their annual letter to shareholders. "In the wake of balance sheet restructurings in the U.S. and elsewhere, we remain one of the few financial institutions with leading global franchises" in both debt and equities, they wrote. 

The bankers are perhaps being defensive ahead of the banks' first-quarter earnings report on April 19, which probably won't be great in large part because of debt-trading revenue that could be as much as 59 percent lower according to some analyst forecasts.

goldman-revenue


Here's the paradox: Goldman Sachs is doing quite well in debt according to a number of different measures.

It's winning a bigger share of the U.S. fixed-income business, which is the biggest and historically most lucrative market, according to investor surveys by Greenwich Associates. It has made particular inroads in the nation's interest-rates and government bonds market, where it is now the leader, the surveys show. 

On the Up and Up
Goldman Sachs' U.S. fixed-income market share
Source: Greenwich Associates
Note: Goldman Sachs didn't make the top rankings in 2013 for rates.

Next, take a look at the bond-underwriting business, which is separate from trading but related. Banks that manage more bond sales are also typically involved in more of the trading around newly issued notes. 

corp-high-yield-govt-syndicated

Meanwhile, trading in corporate debt has actually risen year over year on an absolute basis while remaining fairly steady in U.S. government bonds, according to Finra and Federal Reserve data. 

volume-bank-04-12


And yields on riskier debt have risen, which often gives traders a chance to capture bigger profits as they transact in the notes.

That all sounds pretty good. So why was the start of this year probably such a bummer for Goldman?

Here are some ideas of what could've been better:

1) Benchmark rates could be higher. After more than seven years of ultra-low-rate policies, developed-market yields around the world are near all-time lows and investors are growing accustomed to central-bank intervention. This has led to low profit margins for traders and unsettling, herd-like moves that lack conviction. 

Low Yield
Source: Bloomberg


2) Many firms, including Goldman, are hoping that smaller competitors die out or shrink, leaving them with an even bigger market share. More business for them should equal fatter profits. This is already happening to some extent, with several big European banks slashing their securities units and smaller firms consolidating.

3) Banks could be on the winning side of this volatility for a change, positioning their books perfectly without incurring too much risk. But this balance is getting more difficult to achieve as banks have a smaller hand to play with under new regulations.

Maybe Goldman will surprise everyone with better-than-expected revenues, just as JPMorgan did on Wednesday. Or maybe there’s no other choice but for Goldman executives to say they're devoted to maintaining a robust debt business even as the firm's peers predict lower overall fixed-income profits in the years to come. They’ve already gone down this path. They have to seem committed to it, even if they’re thinking about quietly backing away.

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

To contact the authors of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net
Rani Molla in New York at rmolla2@bloomberg.net

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