Finance

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

Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

JPMorgan just kicked off bank earnings with a remarkable disclosure: a 48 percent surge in debt-trading revenue in the third quarter.

That was way beyond analysts' estimates and a challenge to those who think fixed-income profits are mired in a steady, irreversible decline. The New York bank said it earned $4.3 billion from fixed-income markets in the third quarter, its highest quarterly revenue in more than three years. Citigroup also reported better-than-expected bond-trading revenue, with a 35 percent surge.

On one hand, you could say that JPMorgan and Citigroup benefited from market turmoil brought on by Britain's vote to exit the European Union, uncertainty around money-market reform in the U.S. and some sort of surprising rhetoric out of central banks.

But their good fortune goes beyond that. For the first time in years, traders are fundamentally questioning whether central bankers have enough ammunition to continue their unprecedented stimulus efforts. As a result, investors have more divergent views and are trading more frequently.

To give a sense of just how much more active traders were, take a look at U.S. government bond volumes, which have started to tick up a bit after years of steady decline.  

Pausing the Pain
U.S. Treasury trading volumes appear to be stabilizing after years of steady decline
Source: Fed's primary dealer data

Or check out high-yield bond volumes, which have surged this year.

On the Move
Trading volumes in U.S. high-yield bonds have risen significantly as uncertainty increases
Source: Finra's Trace

A similar trend can be seen for investment-grade bond trading.

Going Up
U.S. investment-grade bond trading has increased on the heels of record new sales
Source: Finra's Trace

Volumes will most likely remain somewhat elevated compared with their levels under the oppressive reign of central-banker influence because investors are paying more attention to individual companies and governments rather than just racing into a broad-based universal rally. 

This will especially be the case if yields remain generally low, which will encourage companies and consumers to keep incurring debt. New debt sales often lead to more activity among existing notes. 

JPMorgan is unique in its size and dominance over certain corners of the debt market. But it benefited from activity that will certainly bolster the profits of other big banks as well.

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
Michael P. Regan in New York at mregan12@bloomberg.net

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