Wall Street Wins (Or Doesn’t Lose Much) on Junk Trading

A few things went right last month for Wall Street’s beleaguered bond dealers, helping to prop up otherwise sagging trading revenue. But that doesn’t mean they’ve reclaimed Masters of the Universe status just yet.

Here’s what went right: Banks from JPMorgan Chase & Co. to Goldman Sachs Group Inc. reported second-quarter earnings that were higher than analysts expected largely on the back of debt-trading revenue that declined less than some of the banks predicted. In particular, they benefited from more transactions in high-yield bonds, a record June for U.S. corporate-debt sales and a couple of decent wagers on Treasuries.

Here’s where the trouble remains: While revenue proves more resilient than anticipated, profits from trading are still falling, with JPMorgan’s fixed-income revenue dropping 15 percent and Goldman Sachs’s sliding 9 percent in the second quarter, excluding an accounting adjustment.

After many quarters of disappointing debt-trading revenues for Wall Street’s biggest banks, some bright spots emerged in the three months ended June 30.

Junk-bond trading volumes soared to a daily average of $7 billion in June, a record for the month and 14 percent higher than the period in 2013, according to data from the Financial Industry Regulatory Authority.

Better Environment

Brokers typically earn bigger profits to trade lower-rated debt than higher-rated notes since they don’t change hands as frequently and carry more risk.

Also, companies sold $160.5 billion of dollar-denominated bonds in June, the most ever for the month with issuance soaring to almost three times as much as the period in 2013, data compiled by Bloomberg show. Not only does this boost transaction fees, but also lifts trading as investors typically are the most active buying and selling debt in the first days after an offering.

“Several events transpired at the end of May, beginning of June that had a calming influence on the markets,” John Gerspach, Citigroup’s chief financial officer, said in a call with investors yesterday. “It was just a better overall environment,” particularly for credit in June, he said.

What’s more, primary dealers that do business with the Federal Reserve boosted their net wagers on the longest-dated Treasuries to as high as $13 billion in the week ended May 28, the highest level in a year. Such debt gained 4.9 percent in the three months ended June 30, Bank of America Merrill Lynch index data show.

So now the question is: Can the biggest banks continue paring declines in trading revenue? Not necessarily. Even JPMorgan sees lower trading activity year-over-year heading into the second half of 2014.

Perhaps June will be nothing more than a brief reprieve.

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