June 22, 2015

Bond Trading Revenues Are Plunging On Wall Street, And Why It Is Going To Get Worse

Among the renewed Greek drama, many missed a key development in the past week, namely Jefferies Q2 earnings, and particularly the company's fixed income revenue: traditionally a harbinger of profitability for Wall Street's biggest source of profit (or at least biggest source of profit in the Old Normal). And while not as abysmal as the 56% collapse in the first quarter, in the three months ended May 31 what has traditionally been the bread and butter of Dick Handler's operation generated just $153 million in revenue.

CEO Handler blamed that decline on a lack of trading in the market and fewer companies selling junk bonds.

To be sure, Q2 was better than the paltry $126 million in the previous quarter, however, the streak of year-over-year declines is now becoming very disturbing for a bank for which an ongoing collapse in fixed income trading will spell certain doom for any ambitious expanion plans, and most likely will result in dramatic headcount reductions to the point where not even fired UBS bankers will be able to find a job at what has long been known as Wall Street's "safety bank."

Unfortunately for both Jefferies and all of its other FICC-reliant peers, we have bad news: the drought in fixed income profits is only going to get worse for two main reasons: turnover, as a function of collapsing liquidity in all markets not just debt, has plunged to match the lowest levels in history, and while junk bond turnover is not quite record low yet, it is rapidly approaching its lowest print as well.

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