While the Fed’s decision to inundate the U.S. economy with more than $3 trillion of cheap money since 2008 by buying Treasuries and mortgaged-backed bonds bolstered profits as all fixed-income assets rallied, yields are now so low that banks are struggling to make money trading government bonds.
Yields on 10-year notes have remained below 3 percent since January, data compiled by Bloomberg show. In two decades before the credit crisis, average yields topped 6 percent.
Average daily trading has also dropped to $551.3 billion in March from an average $570.2 billion in 2007, even as the outstanding amount of Treasuries has more than doubled since the financial crisis, according data from the Securities Industry and Financial Markets Association.
“During the crisis, the Fed went to great pains to save primary dealers,” Christopher Whalen, banker and author of “Inflated: How Money and Debt Built the American Dream,” said in a telephone interview. “Now, because of quantitative easing and other dynamics in the market, it’s not just treacherous, it’s almost a guaranteed loss.”
The biggest dealers are seeing their earnings suffer. In the first quarter, five of the six biggest Wall Street firms reported declines in fixed-income trading revenue.
New York-based JPMorgan, the biggest U.S. bond underwriter, had a 21 percent decrease from its fixed-income trading business, more than estimates from Moshe Orenbuch, an analyst at Credit Suisse, and Matt Burnell of Wells Fargo & Co.
Citigroup, whose bond-trading results marred the New York- based bank’s two prior quarterly earnings, reported a 18 percent decrease in revenue from that business. Credit Suisse, the second-largest Swiss bank, had a 25 percent drop as income from rates and emerging-markets businesses fell. Declines in debt- trading last year prompted the Zurich-based firm to cut more than 100 fixed-income jobs in London and New York.
Chief Financial Officer David Mathers said in a Feb. 6 conference call that Credit Suisse has “reduced the capital in this business materially and we’re obviously increasing our electronic trading operations in this area.”
Jamie Dimon, chief executive officer at JPMorgan, also emphasized the decreased role of humans in the rates-trading business on an April 11 call as the bank seeks to cut costs.
About 49 percent of U.S. government-debt trading was executed electronically last year, from 31 percent in 2012, a Greenwich Associates survey of institutional money managers showed. That may ultimately lead banks to combine their rates businesses or scale back their roles as primary dealers as firms get squeezed, said Krishna Memani, the New York-based chief investment officer of OppenheimerFunds Inc., which oversees $79.1 billion in fixed-income assets.
“If capital requirements were not as onerous as they are now, maybe they could have found a way of making it work, but they aren’t as such,” he said in a telephone interview.
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