It's not looking good for Wall Street bond traders
Spencer Platt/Getty Images
- There's more bad news for Wall Street credit traders: fourth-quarter revenue projections are looking bleak.
- A recent credit sell-off and widening spreads have stoked fears that investment bank woes could get even worse.
- It's been a dismal year for debt traders, who are looking at steep pay cuts amid declining revenues.
Bad news keeps piling up for Wall Street's beleaguered credit traders.
A dreary year for trading at top investment banks is expected to get worse in the fourth quarter, with revenues from fixed income, currency, and commodities (FICC) on pace to decline 13% from 2016, according to an analyst note from JPMorgan.
A recent sell-off in high-yield corporate debt and widening credit spreads are stoking fears that the problems could get even worse.
"The recent sell-off in credit is concerning to us as there has been some volatility with spreads widening, particularly in [high-yield]," JPMorgan analyst Kian Abouhossein wrote in the note.
Abouhossein cited widening spreads in November in two credit indices: a 20-basis-point spread increase on the Itraxx Crossover and a 30-basis-point increase in the JPM Global High Yield index.
So far, the debt sell-off has been limited to specific companies - like French telecom Altice - but a sustained credit sell-off would compound traders' problems, as the falling value of corporate bonds could lead banks to take mark-to-market losses on their books.
JPMorgan is less concerned right now by risk from mark-to-market losses rather than a "prolonged slowdown in revenues" from high-yield debt issuance stalling, as the Federal Reserve unwinding quantitative easing makes the borrowing market less attractive for companies.
High-yield bond issuance was down 9% month-over-month in November, according to the note.
Abouhossein anticipates that credit trading revenues will decline in 2018. He forecasts overall investment bank revenues will increase 3%.
Just the latest bad news for credit traders
This is just the latest blow in what has been a dreary year for Wall Street FICC departments.
While many investment bank employees are looking at increased bonuses this year, a survey last week showed that FICC traders are looking at pay cuts - none more so than credit, where total compensation is expected to dip by 11%.
Wall Street banks saw FICC revenues plummet in the third-quarter, with the largest firms reporting year-over-year declines of between 15% and 30%.
The blame for the decline in trading has largely been ascribed to record-low market volatility, as 2017 has lacked whipsaw market moments that stirred up activity in 2016, such as Brexit and the election of President Donald Trump.
- I quit McKinsey after 1.5 years. I was making over $200k but my mental health was shattered.
- Some Tesla factory workers realized they were laid off when security scanned their badges and sent them back on shuttles, sources say
- I tutor the children of some of Dubai's richest people. One of them paid me $3,000 to do his homework.
- Global GDP to face a 19% decline by 2050 due to climate change, study projects
- 5 things to keep in mind before taking a personal loan
- Markets face heavy fluctuations; settle lower taking downtrend to 4th day
- Move over Bollywood, audio shows are starting to enter the coveted ‘100 Crores Club’
- 10 Powerful foods for lowering bad cholesterol