Markets

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

Wall Street bond traders just had a surprisingly good quarter.

The five biggest U.S. investment banks blew debt-trading expectations out of the water in the three months ended Sept. 30. They reported a collective $14 billion of fixed-income revenue, an amount that was 27 percent higher than the $11 billion income predicted by analysts surveyed by Bloomberg. 

Take That, Expectations
The biggest Wall Street banks reported significantly higher debt-trading revenues than expected
Source: SEC filings, Bloomberg

That $3 billion difference between forecasts and reality is pretty big, especially when the debt business is supposedly more transparent than ever. But it shows the difficulty in predicting future corporate revenues, especially at large banks and particularly in the fixed-income business, which has been notoriously tumultuous.

Not only is it subject to the ebbs and flows in trading volumes, but some parts of the business are more profitable than others, and some banks are able to extract more revenue from some endeavors than others. And while big bank traders are increasingly pairing up buyers and sellers without putting their own money at risk, they're still holding some bonds on their books, which fluctuate in value. 

An article in the Wall Street Journal, for example, highlighted how one Goldman Sachs junk-bond trader earned more than $100 million in trading profits by buying high-yield debt in January, when prices were way down, and then locked in gains later in the year. How does an analyst factor that in to the equation?

Gambling Parlor
U.S. junk bonds have had a terrific year, with yields tumbling, as central bankers added stimulus
Source: Bloomberg USD High Yield Corporate Bond Index

The third quarter was a good time in general for fixed-income activity of all types, raising the question of whether the stellar performance was mostly luck. Perhaps this is one reason bank executives sounded rather subdued rather than taking a victory lap.

"This is good results for the quarter, but we need to do this over multiple years, not multiple quarters," Jonathan Pruzan, Morgan Stanley's chief financial officer, said on an earnings call Wednesday. "We saw tightening spreads, better environment in Europe on ECB buying, better distressed trading volumes," he said, "so a good backdrop and good performance against that."

Harvey Schwartz, Goldman Sachs's chief financial officer, said the best way to describe the quarter was, "It wasn't so much about tailwinds as it was about not having so many headwinds."

Going forward, it will be similarly challenging to predict the profitability of debt trading. Many changes are on the horizon, with a greater proportion of the market moving to electronic systems and U.S. banks grabbing share from weaker European ones. Debt-trading was a bright spot in the third quarter, but it's difficult to know whether the lucrative fixed-income business has returned for good. Pinpointing it ahead of time may be even tougher.

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