Markets

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

Storms never last, especially the perfect ones.

For years, fixed-income, currency and commodity trading desks at big banks have been rife with gloom, doom, depression and fatalism. Firms chopped staff and replaced humans with machines but could still not stave off a decline in debt-trading revenue. This was serious because debt-trading units traditionally were among the biggest money makers for Wall Street.

But the biggest U.S. banks are now reporting a surge in fixed-income profits. Bank of America's debt-trading revenue increased 22 percent in the second quarter. JPMorgan's fixed-income revenue surged 35 percent, and Citigroup's debt-trading unit registered a 14 percent gain year over year.

The good news is that these performances helped pad the banks' second-quarter earnings, which otherwise had some troubling spots. The bad news is one quarter does not signal a sustained turn in the business. Instead, it highlights the perfect storm for big debt brokers that will fade eventually. 

Just how perfect was this period for traders?

Daily volumes in U.S. junk bonds surged 19 percent in the three months ended June 30.

Trade Swell
The high-yield bond market was more active in the second quarter compared with trading in the period a year earlier
Source: Finra's Trace
Trading volumes are from March 30 through June 30

Activity in U.S. investment-grade bonds rose 9 percent.

Heading Up
Investors were more active in U.S. investment-grade bonds in the second quarter
Source: Finra's Trace
Average volumes from March 31 through June 30

 Futures and options contracts on CME Group's exchange, including those tied to interest rates, metals and energy values, surged 13 percent in the quarter compared with activity in the period a year earlier.

Flowing Futures
The number of futures and options contracts on CME Group's exchange rose in the second quarter
Source: CME Group

And while big banks are using much less of their own money to facilitate trades, those that did deploy some cash reaped bigger profits. That's because debt of all types did fantastically well in the second quarter, posting some of their biggest returns since the 2009.

Everything's Awesome
Bonds from the riskiest to safest posted hefty total returns in the second quarter this year
Source: Bank of America Merrill Lynch index data

Crude prices surged the most for a quarter in seven years, with U.S. junk bonds of energy companies posting a 19.4 percent return in the period, Bank of America Merrill Lynch index data shows. Meanwhile, currency volatility was picking up ahead of Britain's vote to exit the European Union.

Combined, these developments created an optimal environment for trading desks. But it's hard to see how it can persist in the long term. Energy values have stabilized somewhat and even shown signs of declining. Moreover, there's a growing acceptance that benchmark interest rates in the U.S. and globally will remain low for a long, long time, perhaps even forever

Like a passing of a storm, the uncertainty of recent months has given way to greater consensus. Investors believe many asset classes will be range-bound for a while. That greater degree of conviction doesn't lend itself to more trading. 

The biggest Wall Street debt-trading desks had a great quarter relative to recent history. They should enjoy it while it lasts but not bank on its persistence.

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