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April 8, 2016 1:07 p.m. ET
Just as New York’s chilly winter weather has lingered into spring, Wall Street traders are finding that frozen debt markets are refusing to thaw.
That is bad news for the biggest banks, which start unveiling first-quarter results next week. The silver lining: Banks’ beaten-down shares already reflect the bad news and are probably too pessimistic.
January and February were harsh months for the fixed-income, currency and commodities desks at big U.S. banks. Trading volumes were anemic after the year kicked off with a bout of extreme volatility that pushed investors to the sidelines.
An uplift in energy and stock prices toward the end of the first quarter raised hopes trading volumes could recover. For investors, the first-quarter outcome matters hugely; this tends to be the strongest part of the year for banks with big capital-markets operations.
But the quarter looks to have ended with a whimper. In March, average daily bond-trading volume dropped 3.3% from a year earlier, according to the latest data from the Securities Industry and Financial Markets Association. Treasury bond volumes fell 4.3%, and agency mortgage-backed-securities trading declined 4%.
There has been ample warning the first quarter would be bad. In early March, Citigroup
’s finance chief said revenue from equities and fixed-income trading likely fell 15% in the first quarter from a year earlier. In February, J.P. Morgan Chase
said its first-quarter trading revenue was off by about 20%.
Still, it seems safe to say a prolonged freeze or even further deterioration of trading conditions is largely priced in. Shares of the six biggest U.S. banks are down by an average 18% this year. Granted, this reflects other concerns as well, most notably persistently low interest rates.
Even so, the stocks look cheap. Five of the six trade at discounts to book value. Even a slight thaw in trading could trigger a rebound.
Spring is coming late to the debt markets. That doesn’t mean it will never come.
Write to Aaron Back at [email protected]