- There’s more bad news for Wall Street credit traders: fourth-quarter revenue projections are looking bleak.
- A recent credit sell-off and widening spreads have stoked fears that investment bank woes could get even worse.
- It’s been a dismal year for debt traders, who are looking at steep pay cuts amid declining revenues.
Bad news keeps piling up for Wall Street’s beleaguered credit traders.
A dreary year for trading at top investment banks is expected to get worse in the fourth quarter, with revenues from fixed income, currency, and commodities (FICC) on pace to decline 13% from 2016, according to an analyst note from JPMorgan.
A recent sell-off in high-yield corporate debt and widening credit spreads are stoking fears that the problems could get even worse.
“The recent sell-off in credit is concerning to us as there has been some volatility with spreads widening, particularly in [high-yield],” JPMorgan analyst Kian Abouhossein wrote in the note.
Abouhossein cited widening spreads in November in two credit indices: a 20-basis-point spread increase on the Itraxx Crossover and a 30-basis-point increase in the JPM Global High Yield index.
So far, the debt sell-off has been limited to specific companies — like French telecom Altice — but a sustained credit sell-off would compound traders’ problems, as the falling value of corporate bonds could lead banks to take mark-to-market losses on their books.
JPMorgan is less concerned right now by risk from mark-to-market losses rather than a “prolonged slowdown in revenues” from high-yield debt issuance stalling, as the Federal Reserve unwinding quantitative easing makes the borrowing market less attractive for companies.
High-yield bond issuance was down 9% month-over-month in November, according to the note.
Abouhossein anticipates that credit trading revenues will decline in 2018. He forecasts overall investment bank revenues will increase 3%.
Just the latest bad news for credit traders
This is just the latest blow in what has been a dreary year for Wall Street FICC departments.
While many investment bank employees are looking at increased bonuses this year, a survey last week showed that FICC traders are looking at pay cuts — none more so than credit, where total compensation is expected to dip by 11%.
The blame for the decline in trading has largely been ascribed to record-low market volatility, as 2017 has lacked whipsaw market moments that stirred up activity in 2016, such as Brexit and the election of President Donald Trump.
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