I see this as the another sign of profit deterioration of the low interest driven businesses, starting with mortgage lenders and now with bond traders. I expect more of this news coming up for carry trade and other currency derivative trading, and them will be car sales (due to dry up of car loans thanks to higher rate) and trickle down to the rest of economy.
From Bloomberg Sept/17
Jefferies Profit Tumbles 83% on Plunge in Bond Trading
Jefferies Group LLC, the investment bank owned by Leucadia National Corp. (LUK), said fiscal third-quarter profit tumbled 83 percent as trading revenue fell to the lowest since the depths of the financial crisis.
Net income for the three months ended Aug. 31 dropped to $11.7 million from $70.2 million a year earlier, the New York-based firm said today in a statement. Jefferies was acquired this year by Leucadia, whose quarter ends Sept. 30.
Revenue from fixed-income trading, a unit overseen by William Jennings and Johan Eveland, plunged 88 percent to $33.1 million, bringing total revenue from buying and selling securities to $184.1 million, the lowest since the fourth quarter of 2008. The biggest Wall Street trading firms are scheduled to report third-quarter earnings in October. JPMorgan Chase & Co. (JPM), the largest U.S. bank, said this month revenue from trading could fall as much as 5 percent.
“We experienced a very challenging summer in our fixed-income businesses due to the rising-rate environment, spread widening, redemptions experienced by our client base which heavily muted trading, and related mark-to-market writedowns within our inventory,” Jefferies Chief Executive Officer Richard Handler, who also runs Leucadia, said in the statement.
Handler, 52, said earlier this year that Jefferies saw a significant slowdown in fixed-income trading during March and April resulting from concern about the tapering of the Federal Reserve’s bond-buying program. Speculation that the Fed will reduce its $85 billion in monthly buying has sent the benchmark 10-year Treasury yield to its highest level since 2011.
September Improvement
“Fixed-income markets were most unsettled in June, while July and August were more balanced,” Handler said in today’s statement. “Since Labor Day, client flows have been stronger, and fixed-income performance has markedly improved to more normal levels,” he said, referring to the U.S. holiday on Sept. 2.
Central-bank stimulus has helped drive a global equity rally, with the Standard & Poor’s 500 Index (SPX) rising more than 150 percent from its bear-market low in 2009. The U.S. gauge fell as much as 4.6 percent from an Aug. 2 record as speculation increased that the Fed would begin winding down its monetary support.
“This quarter is going to be a quarter where banks differentiate themselves on how they manage risk and execute,” said Charles Peabody, an analyst at Portales Partners LLC in New York. “Execution is going to be key in differentiating who did well and who didn’t.”
Stock Trading
Jefferies’s revenue from trading stocks also declined, falling 28 percent to $151 million from the year-earlier period. Investment-banking revenue climbed 23 percent to $319.3 million amid increases in fees from underwriting and advising clients.
Jefferies recorded negative revenue from principal transactions of $24.9 million in the quarter. That compares with $297 million in revenue in the same period of 2012.
The firm marked down its investment in the former Knight Capital Group Inc. by $16 million in the fiscal third quarter amid declines in that firm’s stock price, Handler said in the statement. That mark-down was recorded in the firm’s equities net revenue, he said.
JPMorgan said last week that third-quarter revenue from trading stocks and bonds could be unchanged to down as much as 5 percent from a year earlier. September 2012 was “particularly strong, and we’re not necessarily expecting it to be as strong this year,” Chief Financial Officer Marianne Lake said at an investor conference.
Shares of Leucadia fell 0.9 percent to $28.05 at 4:15 p.m. in New York, after rising as much as 1.6 percent before earnings were released. They declined about 21 percent in the three months ended Aug. 31 amid a surge in interest rates. In that same period, yields on the benchmark 10-year Treasury climbed from 2.1 percent to 2.8 percent. The S&P 500 was little changed.
To contact the reporter on this story: Laura Marcinek in New York at lmarcinek3@bloomberg.net.
To contact the editor responsible for this story: Christine Harper at charper@bloomberg.net; David Scheer at dscheer@bloomberg.net
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