Brexit bump instills no confidence on sullen bond trading floors

By Olivia Oran

(Reuters) - Even after a good quarter, optimism is hard to find on Wall Street's bond trading floors.

Revenue from fixed income, currency and commodities trading was up 24 percent at the five biggest U.S. banks in the second quarter from a year ago, to $11.8 billion, according to a Reuters calculation based on the banks' reported results.

Results were helped by Britain's surprise vote to leave the European Union, which rippled across global markets – including record currency volumes for some big banks.

But executives say that bump in activity was short-lived. Although markets have not ground to a halt, activity so far in the third quarter has not been robust. Some upcoming monetary policy decisions may spur more action, but Wall Street's hopes are not high that this will be a turnaround year for bond trading.

"We aren't buying into it just yet," said Brian Kleinhanzl, a bank analyst with Keefe, Bruyette & Woods. "The environment is fragile because if there is just one negative event, investors will move to the sidelines."

Apart from an odd quarter here and there, top bankers have watched bond trading revenue grind lower for about seven years. That is partly because investors have been parked on those sidelines, and new regulations on proprietary trading, derivatives and capital have restricted what banks can do in bond markets, making the business less lucrative.

From 2009 to 2015, JPMorgan Chase & Co (NYSE: JPM), Citigroup Inc (NYSE: C), Goldman Sachs Group Inc (NYSE: GS), Bank of America Corp (NYSE: BAC) and Morgan Stanley (NYSE: MS) saw annual revenue from bond trading drop by $34 billion, or 44 percent.

Those banks have reported earnings through the second quarter, showing bond trading essentially flat for the first half of this year. Morgan Stanley reports results on Wednesday.

"There's been lots of adjustment in the fixed-income industry over the past several years," Mizuho's head of fixed income sales and trading Thomas Hartnett said in an interview. "Fortunately, this gives us a clearer picture of the 'new normal.'"

Trading volumes could get a lift this summer from a much-anticipated Bank of England meeting, or from Japan's central bank taking action to spur its economy. But on conference calls to discuss second-quarter results, senior bank executives largely shied away from making predictions about fixed income markets being resilient in the second half of the year.

In fact, even though the Brexit vote provided a momentary boon for trading, it's exactly the type of event that spooks investors in the first place, said Goldman Chief Financial Officer Harvey Schwartz.

"The violence of the first quarter ... and the concerns about Brexit in the second quarter – I think it's fair for us to say we feel like these are the types of factors that contribute to reduced client sentiment. They reduced confidence, and as a result they reduce activity," he said.

Goldman cut bond trading staff in the first half of the year as part of a broader initiative to reduce annual expenses by $700 million.

Analysts are being cautious in their forecasts for bond-trading revenue, arguing that the business remains challenged and will almost certainly never return to its glory days.

"This quarter was comparatively better but it wasn't resounding," said Justin Fuller, a senior director at Fitch Ratings who focuses on bank stocks. "Trading is still largely episodic."

(Reporting by Olivia Oran in New York; Additional repoting by Dan Freed in New York and Anjuli Davies in London; Editing by Lauren Tara LaCapra and Nick Zieminski)

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