In Your Debt

Wall Street's Thank-You Letter to Corporate America

Record investment-grade bond issuance supercharges trading.
At Closing, June 18th
108.18 USD

Wall Street owes a big thank you to Corporate America.

Companies sold an unprecedented amount of dollar-denominated investment-grade bonds in the first three months of the year. While this is increasing corporate leverage and making some companies more vulnerable should the economy sour, it did two wonderful things for the largest U.S. banks: First, it provided billions of dollars of investment-banking fees for underwriting $416.1 billion in debt, based on Bloomberg data. And second, newly sold bonds tend to trade more frequently than older ones. That means the boom in debt sales translated into a record amount of activity among U.S. investment-grade bonds, contributing to what is expected to be a standout quarter for fixed-income trading revenues.

Moving Around

Investment-grade bond trading volumes have surged this year as issuance soared

Source: Securities Industry and Financial Markets Association

This dynamic is important to keep in mind as the largest U.S. banks start reporting their first-quarter earnings, starting this week with JPMorgan Chase & Co. and Citigroup Inc., the two largest fixed-income trading firms based on global revenues. Bloomberg Intelligence analysts expect that debt trading at the largest banks most likely gained for a fourth consecutive quarter compared with the year-ago period.

Big Gains

Company debt and mortgage-related securities have driven this year's trading gains

Source: Bloomberg Intelligence, NY Fed Primary Dealer data

JPMorgan analysts said last month that they expect total sales from fixed-income, currency and commodities to climb 34 percent in the first quarter compared with a year earlier because of more credit trading.

Several factors contributed to the likely gains. There's more disagreement about the direction of benchmark borrowing costs in the U.S. than in prior years; the Federal Reserve is raising interest rates; the global economy seems to be in a better place than it was a year ago; and inflation is ticking up.

Disagreement among fund managers about fundamental trends often leads to more activity. And there was plenty of debate around the direction of rates, credit, commodities and currencies, all of which are lumped into Wall Street's fixed-income trading results.

But the surprisingly large amount of corporate-debt issuance played a big role. Fueling the ravenous appetite for borrowing was an effort by companies to take advantage of low rates before they start to edge up, a desire to lock in tax deductions for interest payments before laws change and continuing tremendous demand for company notes, even the longest-dated ones, as pension funds move back into bonds from riskier stocks after realizing some gains.

Raining Bonds

Companies sold an unprecedented volume of U.S. bonds in the first quarter

Source: Bloomberg

There will continue to be angst about whether this debt is worthwhile. A lot of it is being used to make expensive acquisitions, buy back pricey shares or store money in offshore accounts to avoid hefty taxes. This borrowing binge will eventually stall out when interest rates rise more substantially or if the economy deteriorates.

But for now, active debt markets have provided an unabashed boon for Wall Street's largest trading houses.

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

    To contact the editor responsible for this story:
    Daniel Niemi at

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