Canada Bond Desks’ ‘Last Hurrah’ Brings 26% Surge in Trading

  • Fixed-income trading revenue hits $5.5 billion at six banks
  • Bond desks outshine equities trading in best gains since 2012

The Masters of the Universe are back.

Bond traders have become this year’s revenue rock stars for the capital markets operations of Canada’s biggest banks, matching the reversal of fortune for debt-trading desks across Europe and Wall Street.

Revenue from trading fixed-income products -- bonds, currencies and commodities -- soared 26 percent to C$7.34 billion ($5.53 billion) at the six biggest Canadian banks this fiscal year, the most in at least six years and the largest gain since 2012, according to financial disclosures. Bond desks outshone stock traders, who suffered a 19 percent slump in revenue for the year ended Oct. 31. Overall trading revenue, including equities, rose 4.8 percent to about C$10.6 billion at the six firms.

“It was a really solid year for bond trading,” Ian Russell, head of the Investment Industry Association of Canada, said in an interview. “It’s going to be really difficult to come anywhere close to those numbers in the next couple years so it may be a fitting end -- the last hurrah -- for the Canadian bond market for awhile.”

Bond traders, dubbed the ‘Masters of the Universe’ in Tom Wolfe’s novel “The Bonfire of the Vanities,” benefited from heightened volatility as political events like the Brexit vote and U.S. election roiled government bond and currency markets. Increased debt underwriting by Canadian banks in the U.S. and Europe has also led to more secondary trading revenue.

Gains on Canadian bond desks mirror rallies in Europe and on Wall Street, where fixed-income trading has traditionally been the biggest source of investment-banking profits. JPMorgan Chase & Co.’s jump in fixed-income revenue helped the New York-based firm beat analysts’ profit estimates in the third quarter. Citigroup Inc.’s profit also topped expectations after posting a 35 percent surge in fixed-income trading.

The gains represent a turnaround for bond traders, after increased regulation, low volatility and falling interest rates crimped business in recent years. Revenue from fixed-income trading at the world’s biggest investment banks tumbled to $70 billion in 2015, about half the 2009 level, according to data compiled by financial-research firm Coalition Ltd.

Canada Stronger

Canada has fared better. Trading in fixed-income including currencies and commodities was as high as C$6.28 billion in 2010 for the six biggest Canadian lenders. Trading sunk to C$4.54 billion a year later, and has stayed above C$5 billion a year since then. Last year, trading rose 8.2 percent to C$5.8 billion.

“The environment is definitely more healthy for fixed income,” Jonathan Hunter, global head of fixed income and currencies at Royal Bank of Canada’s RBC Capital Markets, said by phone.

While Russell says a sell-off following the election of Donald Trump may spell the end of the bull market in bonds, Canadian banks have benefited from the rise in volatility. 

RBC posted a 26 percent jump in fixed-income trading to C$2.39 billion, the highest revenue among Canada’s banks. The firm, the top arranger of Canadian corporate bonds for at least 17 years, leads the nation’s banks on European bond issuance this year and ranks 23rd overall with 18.8 billion euros ($20 billion) of deals. RBC’s focus on originating, selling, and trading new bonds in the secondary market in Europe has been essential, Hunter said.

“Credit is obviously absolutely crucial,” he said. “You’ll see that a significant portion of the lift in our revenues between 2015 and 2016 came from that credit business.”

Bond Issuance

Growth in the U.S. market has helped counter declines at home for Canadian lenders. Credited U.S. corporate bond sales were little changed at $1.56 trillion this year compared with the same period last year, whereas Canadian sales slid 7.9 percent to C$86.9 billion to Dec. 7, according to Bloomberg data.

Toronto-Dominion Bank, Canada’s second-largest lender, saw a 28 percent surge in trading. Moti Jungreis, head of global markets, said that’s from bulking up the capital markets operations, including expanding its U.S. dollar business and benefiting from European banks retreating from the U.S. Toronto-Dominion’s TD Securities is the top Canadian bank for arranging U.S. dollar bonds this year and ranks 12th overall with $60.6 billion of deals, Bloomberg data show.

“We always had an aggressive growth strategy. We believe that we have a competitive advantage to continue to grow our business in Canada and outside Canada,” Jungreis said.

Bank of Montreal, the fourth-largest lender, also posted a 28 percent trading jump to C$1.08 billion.

Sweet Spot

“Some of the movements that we’ve seen in anticipation of movements in interest rates have been helpful to the business and the same is true on the currency side," Chief Financial Officer Tom Flynn said in a phone interview. “When you have a level of volatility that keeps people interested and results in markets moving, but not moving too much, it’s kind of a sweet spot.”

Canadian Imperial Bank of Commerce, the country’s fifth-largest lender, had a 33 percent jump in fixed-income trading, the highest increase among the banks. The firm benefited by sticking by its clients amid volatile markets, according to CFO Kevin Glass.

Bank of Nova Scotia, the third-largest, had a 32 percent increase to C$1.25 billion. 

Montreal-based National Bank of Canada was the only lender to post a decline, with revenue down 1 percent to C$379 million. Higher fixed-income trading was offset by declines in commodities and foreign exchange, the bank said. No one was immediately available to comment.

    Before it's here, it's on the Bloomberg Terminal.