A trading unit Morgan Stanley left for dead could be 'the most exciting business' if these two things happen

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Morgan Stanley CEO James Gorman

• Morgan Stanley's chief executive officer James Gorman thinks fixed income could be an exciting business for the bank if two things happen.
• It's a business that crushed it in the first three months of the year. But it's also one the bank left for dead in 2015.

A trading unit at Morgan Stanley has made a big turnaround, and chief executive James Gorman now thinks there's a chance it could again become red hot.

Gorman, speaking at the Morgan Stanley US Financials Conference in New York on Tuesday, said fixed-income trading could be the "most exciting business" if two things play out.

Fixed income trading was a standout in the firm's first quarter earnings, posting its best results in the unit since 2015.

Still, it's one the bank took an axe to in 2015, cutting 25% of its workforce, replacing its leadership, and slashing bonuses.

But things are looking up, Gorman said. And the good times could keep rolling if market volatility hangs around and the central banks start to raise rates. Here's Gorman:

"Fixed income is the most exciting business if two things happen. One is some volatility creeps into the market that you see some QE and you see the Fed ... start raising rates. Eventually Europe will raise rates, eventually Japan will raise rates. See, you've got both the recovery and the credit part of the fixed income business and micro part and the recovery potential in the macro pod and that's sort of what we're seeing."

Ted Pick, Morgan Stanley's head of sales and trading, said in early 2016 that the decision to rightsize the business was largely the result of the fixed income wallet, or total revenue pool, shrinking by around 40%. Revenues for the business in the fourth quarter of 2015 came in at just $550 million.

Gorman said that pool has been expanding a bit since then. Morgan Stanley's market share for fixed income trading stands at around 8 to 10%, he added.

Morgan Stanley's fixed income results of $1.9 billion for the first quarter this year were only slightly behind those of rival Goldman Sachs, which posted revenues of $2.1 billion for the business.

As for Gorman, he's bullish that fixed income revenue could continue to surpass $1 billion per quarter.