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Banks’ Debt Trading Surge Rolls on With Goldman Joining Party

Hannah Levitt
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Banks’ Debt Trading Surge Rolls on With Goldman Joining Party

(Bloomberg) -- Whether it was juicy spreads in repo lending or a rally in junk bonds, the fourth quarter broke all the right ways for Wall Street’s trading desks.

Goldman Sachs Group Inc. and Bank of America Corp. on Wednesday joined the trend of surging past expectations for fixed-income trading in the period. The four largest Wall Street firms posted a collective 56% jump in that business, the biggest leap in more than eight years.

That offered relief for major Wall Street trading desks after a year that began with their weakest revenue in a decade. As more trading moves to electronic platforms, the biggest banks are betting that the scale of operations will help them gain market share.

“Investors are more willing to trade in this environment,” KBW analyst Brian Kleinhanzl said in an interview. “What we’re seeing still is the overall wallet still has pressure on it, and the banks are fighting aggressively to take market share in their respective strengths.”

Wednesday’s results follow earnings from JPMorgan Chase & Co. and Citigroup Inc. that surpassed expectations on Tuesday. JPMorgan’s staggering 87% climb in debt trading revenue for the quarter helped drive annual profit to a record. Citigroup’s 56% fixed-income gain signaled a rebound after the firm set out to eliminate 400 people in the trading division last year following weak results.

Goldman Sachs’s bond traders also posted a comeback quarter, with revenue surging 63% from a year earlier. Chief Financial Officer Stephen Scherr said Wednesday that four of its five major market-making businesses were up from the prior year. Rates performed “particularly well,” and currencies benefited from “a better geopolitical backdrop, despite lower volatility,” Scherr said.

A number of banks cited the rates business as an area of strength as traders reacted to the gap between two-year and 10-year Treasury yields swinging from negative in August to its widest level of 2019 by the end of December. Banks also benefited from being able to capture profits lending in the repo market knowing the central bank was serving as a backstop.

Repo rates stabilized in the fourth-quarter, largely due to the Federal Reserve’s liquidity injections that have calmed the markets since September. These operations have allowed the central bank’s primary dealers, which include some of the largest U.S. banks, to borrow from the Fed at lower rates and force others to pay a higher rate.

“Over the course of 2019 we deployed balance sheet by example against repo where there was demand for liquidity, particularly in the context of the various uncertainty that existed in the repo market,” Scherr said.

The firms’ credit businesses got a boost from rallies across markets. U.S. corporate high-yield bonds had their best quarter since the first three months of the year, while the investment-grade index reached a record high, according to Bloomberg Barclays indices.

Trading revenue at Bank of America climbed 13% in the fourth quarter -- more than analysts were expecting, but paling in comparison to gains at its competitors. BofA shares slipped as much as 2.8%, while Goldman joined Citi and JPMorgan in rallying after results.

Equity trading at Goldman Sachs and Bank of America both fell short of estimates, bucking the trend set Tuesday by JPMorgan’s and Citigroup’s beats.

The rebound in banks’ trading desks helped the Wall Street sides of the business match the retail units that have helped drive profit to new heights. The biggest banks have also reaped billions from lower tax rates, allowing them to ramp up buybacks and dividends.

“What we’re seeing is a steady, stable, consistent group with not nearly as much volatility in the fundamentals as what the stock prices have shown over the last two years,” Marty Mosby, an analyst at Vining Sparks, said in a Bloomberg Television interview.

--With assistance from Alexandra Harris, Sridhar Natarajan, Lananh Nguyen, Yalman Onaran and Michelle F. Davis.

To contact the reporter on this story: Hannah Levitt in New York at hlevitt@bloomberg.net

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Dan Reichl

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