By Tatiana Bautzer
NEW YORK, Oct 14 (Reuters) – A steep selloff in the bond market showed up in Wall Street bank earnings during the last quarter, with some banks showing weaker fixed income trading as high interest rate volatility during the quarter curbed demand for transactions.
During the quarter, Treasury yields reached multi-decade highs with some days showing abrupt moves in the market as investors repriced their expectations for where interest rates will go.
At Morgan Stanley, revenues from fixed income, currencies and commodities trading (FICC) fell 7% in the quarter from a year earlier. At JPMorgan, the drop was 4% and at Bank of America, 17%. Goldman Sachs had flat revenues with FICC trading. Citi was the odd one out, increasing its revenue 4% from a year earlier.
“Interest rates rose pretty furiously throughout the third quarter, and it was unexpected versus where the market was in the second quarter”, said Morgan Stanley Chief Financial Officer Sharon Yeshaya. There was less demand for structured transactions and the widening of credit spreads was a challenge to investors that have bond portfolios.
Benchmark 10-year yields showed their biggest quarterly rise since 2009 at the end of September.
“Reduced client activity and changing market conditions, including a major shift in interest rates, significantly affected our leading FICC businesses, including credit, mortgages and municipals,” according to Bank of America Chief Financial Officer Alastair Borthwick.
At Citigroup, most of the 4% growth in FICC trading revenue came from foreign exchange business and spread products. Citi CEO Jane Fraser told analysts rates revenue “was pressured by the trading environment, but we saw good growth in forex and spread products, both stable revenue streams.”
Another effect of rising long-term yields on the banks’ balance sheets was the higher volume of unrealized losses in securities portfolios.
Bank of America, for example, showed unrealized losses on its bond portfolio – mortgage-backed securities and US Treasury, government-agency bonds – at $109 billion in the quarter ended September, up from $85 billion at the end of June, as bond yields rose in the last quarter.
The bulk of these securities were in held-to-maturity segment, which the bank does not intend to sell.
EQUITIES SHINE
The results contrasted with that from equities trading desks, which brought eye-popping revenue growth in the quarter. At Goldman Sachs, equity trading revenue rose 72%, with higher revenues in derivatives and financing. Morgan Stanley equity revenues grew 41% and JPMorgan’s, 49%. Bank of America and Citi had the lowest equity trading revenues growth, 11% and 14%, respectively.
Oppenheimer analyst Chris Kotowski sees increased risk in the reliance on equity revenues, that may be volatile. “We do fear that there is an ‘easy come, easy go’ risk with these revenues,” he wrote in a note to clients.
(Reporting by Tatiana Bautzer; additional reporting by Saeed Azhar; editing by Megan Davies and Nick Zieminski)
Comments