The topic of disappearing bond market liquidity and volume has been beaten to death on this site over the past several years. Nothing new here: thanks to the Fed's central-planning mission creep which has made efficient and fair markets into a surreal mockery, first equity, and then fixed income trading has been made irrelevant as there is no longer such a thing as price discovery, and with it have disappeared liquidity in the two largest equity and fixed income markets in the world.
It got so bad even the TBAC was openly complaining to the Treasury last August that there is no longer a bond market in the conventional sense, with the clear implication that since there are barely any fixed income transactions, Wall Street can't make money on either flow or prop trading side of things (and also warned that if and when the selling starts in earnest, watch out below). Alas, since Wall Street was explicitly fighting the Fed (remember: the main reason there is no volume is because nobody is selling) Wall Street has once again lost, and despite its appeals, the time to pay the piper has come. Said payment will be taken out of bank Q1 earnings which as everyone knows, will continue the declining trend seen in recent years (so much for that whole Net Interest Margin fable), but to learn just how bad, we go to the FT which reports that fixed income groups across Wall Street "are set for their worst start to the year since before the financial crisis, with revenue declines of up to 25%."
The punchline: "Analysts now expect Goldman Sachs to record its weakest first quarter since 2005 and JPMorgan Chase and Bank of America are forecast to see their lowest revenues since they bought Bear Stearns and Merrill Lynch, respectively, in 2008."
More from FT:
The weakness is expected to be even more severe among European banks such as Deutsche Bank and Credit Suisse, which are looking to meet new capital requirements by shrinking their balance sheets. “Anecdotally it seems Europeans are losing most share in the US itself and so are losing global diversification,” said Huw van Steenis, analyst at Morgan Stanley.
Citigroup and JPMorgan Chase have warned publicly that fixed income revenues – the engine of most investment banks’ profits since 2000 – will be down by double digits when they report first-quarter earnings next month. But other banks privately warn that their year-on-year declines could exceed 25 per cent after both institutional investors and banks shied away from trading. The first quarter is traditionally a high point for revenues.
The top 10 banks are expected to make a combined $24.8bn of revenues in fixed income trading, which includes bonds, currencies and commodities, according to Morgan Stanley and Credit Suisse estimates, more than 40 per cent below the first quarter of 2009 when the market rebounded sharply from the crisis.
Christian Bolu, analyst at Credit Suisse, estimated that US government bond trading volumes are down about 8 per cent so far this year compared with the same period in 2013. Trading of mortgage-backed securities backed by the US government is down 41 per cent, while corporate bond trading has increased by 12 per cent.
And why wouldn't it be? Recall that not even HFTs make incremental money in stocks and bonds, having been forced into that wild west of FX and options (and the result is that even cash cows like Virtu are now selling equity, as the trading top is obviously in). Who do banks have to thank for this? Why the Fed of course, which has made volatility a thing of the past, and with it, has essentially made selling of any kind borderline illegal.
Also keepin mind that 2013 wasn't exactly a blockbuster year: as was reported today by NY State, total 2013 Wall Street profits were $16.7 billion, down 30% from 2012, and the second lowest since the Lehman collapse. At this rate 2014 will be the second year in a row in which Wall Street profits have declined (if not bonuses), and may be the worst year for bank profitability since 2008.
So what happens next:
Two of the top five fixed income divisions told the Financial Times they expected to respond by cutting more jobs because the market is worse than expected, with traders blaming patchy macroeconomic data, interest rate uncertainty, regulation that limits risk taking and worries about the situation in Ukraine.
“Effectively, the casino is empty this quarter,” said Brad Hintz, analyst at AllianceBernstein.
The good news: as the NY State comptroller reported today, 2013 bonuses of $26.7 billion were the highest since the Lehman crisis. So for everyone who has a job: enjoy your near-record bonus. For everyone else, repeat after us: "but... but... the recovery"