Markets

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

It was fun while it lasted.

For a few quarters, it seemed as though the bond-trading business was back in force, with trading volumes accelerating to records on the heels of a flood of new debt sales and more uncertainty about the U.S. economy. Most of the big U.S. banks enjoyed better-than-expected earnings in the first three months of the year, in large part because of stellar bond-trading revenues.

Off the Highs
After a stellar first quarter, bond-trading volumes have been dropping off
Source: Financial Industry Regulatory Authority's Trace system, Bloomberg

But there are signs that the elevated activity is on the wane. Corporate-debt trading volumes dropped 20.4 percent in April from the prior three months, with that month's credit-trading volumes coming in lower than those in the month a year earlier. Since the end of the first quarter, company-bond trading has fallen 16 percent to an average $23.7 billion a day, below the daily average of $25.2 billion in the period last year, according to Finra's Trace data.

Steep Drop-Off
Credit trading volumes slowed considerably in April, even relative to the same period last year
Source: Securities Industry and Financial Markets Association
Data includes both investment-grade and high-yield bond trading volumes

There has also been a drop-off in trading of other types of debt, such as municipal bonds, Treasury and agency-backed mortgage-backed securities markets.

This shouldn't be all that surprising given the parade of news and analyst reports about the lack of volatility and growing fears of investor complacency. And corporate-debt issuance has slowed from the torrent earlier in the year as companies run out of reasons to borrow money.

Subdued Sales
After an unprecedented first quarter of U.S. corporate-debt sales, issuance is slowing
Source: Bloomberg

The implication of this reduction in trading is significant for the largest banks. It points to less robust earnings at their bond-trading units than they've been enjoying in recent months. And it points to a tougher backdrop for the fast-trading set. Short-term trading opportunities have been scant, with volatility dropping to painfully low levels and stock and bond markets largely failing to make any remarkable moves.

There's still plenty of uncertainty out there, but it feels more like long-term macro angst that's hard to profit from. Consider a recent LinkedIn post by Bridgewater's chairman and chief investment officer, Ray Dalio. He had some good news, writing, "We see no major economic risks on the horizon for the next year or two."

But there was some bad news there as well. He wrote, "We fear that whatever the magnitude of the downturn that eventually comes, whenever it eventually comes, it will likely produce much greater social and political conflict than currently exists."

While that sounds significant and fundamentally frightening, it doesn't offer up any quick trading opportunities. Some traders are clearly just waiting this period out, sticking with their investments and going about their daily business.

Given this backdrop, it makes sense to expect more muted gains in debt-trading revenues at the largest Wall Street firms in the near future. This is a classically fickle stream of business for the biggest banks, and it looks as if the great first-quarter bond boom is starting to fade.

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