Bond trading weakens for US banks as interest rate volatility affects investors

U.S. banks experienced weak bond trading in the last quarter due to high interest rate volatility, impacting investors' demand for transactions, according to Reuters. Treasury yields reached multi-decade highs, with abrupt market moves caused by investors reassessing their expectations for future interest rates. Wall Street banks reported varying declines in fixed income, currencies, and commodities trading revenues during the period.

Morgan Stanley saw a 7% decrease in FICC revenues from the previous year, JPMorgan reported a 4% drop, and Bank of America faced the steepest decline at 17%. Goldman Sachs maintained flat revenues with FICC trading, while Citi increased its revenue by 4% compared to the prior year. Morgan Stanley's CFO, Sharon Yeshaya, attributed the decline to reduced demand for structured transactions and widening credit spreads.

Bank of America CFO, Alastair Borthwick, mentioned that changing market conditions, including a significant shift in interest rates, negatively affected the bank's leading FICC businesses, encompassing credit, mortgages, and municipals. Citigroup CEO, Jane Fraser, highlighted that the majority of the 4% growth in FICC trading revenue came from foreign exchange business and spread products, both stable revenue streams.

The rising long-term yields affected banks' balance sheets, leading to higher unrealized losses in securities portfolios. Bank of America reported $109 billion in mortgage-backed securities and US Treasury, government-agency bond unrealized losses, up from $85 billion in June. The majority of these securities were held-to-maturity, meaning the bank does not intend to sell them.

Equity trading revenues grew significantly at Goldman Sachs (72%), Morgan Stanley (41%), and JPMorgan (49%), while Bank of America and Citi experienced lower growth in this area (11% and 14%, respectively). Analyst Chris Kotowski warned that reliance on volatile equity revenues could pose risks for banks.