The giant U.S. banks JPMorgan Chase & Co. and Citigroup Inc. said Thursday that languid bond markets in recent months took a toll on third-quarter profit, sapping trader activity while reducing opportunities to bet on big price swings.
The firms are the first big Wall Street firms to post earnings for the quarter, signaling the possibility of similarly dire results at rivals Bank of America Corp. , Goldman Sachs Group Inc. and Morgan Stanley that are scheduled to report on the period over the coming week.
Revenue in JPMorgan's bond-trading division tumbled 27% from a year earlier to $3.2 billion, while Citigroup's slid 16% to $2.9 billion.
"Lower revenue across all products was driven by sustained low volatility and tighter credit spreads," JPMorgan said in a statement.
A credit spread is the difference between the yield on risky fixed-income instruments -- such as corporate, mortgage-backed, or emerging-market bonds -- and those on bonds deemed to have the lowest risk, such as U.S. Treasuries. When such spreads tighten, or narrow, it means holders reap smaller rewards for taking incremental risk. That's a key factor in bank earnings since many of the firms buy risky bonds to reap the additional yield.
Overall, JPMorgan's net income climbed 7% to $6.73 billion. Citigroup's total profit rose 8% to $4.1 billion.
Big Wall Street firms have been haunted this year by unusually low price swings in low global markets. Analysts and investors have struggled to explain the low volatility, especially given this year's plethora of turbulent political events, from the topsy-turvy fate of President Donald Trump's legislative agenda such as healthcare and tax cuts to military tensions with North Korea and the recent shooting in Las Vegas.
NOTE: Shawn Snyder, in the video above, is head of investment strategy at Citi Personal Wealth Management.
There's also been rampant speculation over the trajectory of Federal Reserve monetary policy, not to mention Trump's choice of Federal Reserve chair following the expiration of Janet Yellen's term next year.
Some market observers say the flood of money-printing by central banks in recent years has made it nearly possible for assets to lose value, even when risk is climbing and there are ample reasons for a market selloff.
Revenue from Wall Street banks' mammoth bond-trading divisions probably tumbled 12% on average in the third quarter from a year earlier, Goldman Sachs analysts wrote this week in a report.
Citigroup attributed the malaise in its fixed-income division to lower revenue from government-bond trading and foreign exchange, "given low volatility in the current quarter and the comparison to higher Brexit-related activity a year ago, as well as lower activity in spread products."
One bright side of the quarter came from stock trading, which also has been plagued by low volatility this year. Revenue in Citigroup's equity-markets division climbed 16% to $757 million, reflecting gains from transactions conducted on exchanges as well as from derivatives and trading loans.
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