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It has been a good few months for Wall Street debt traders. Credit-trading profits surged in the three months ended June 30. And based on recent market activity, fixed-income revenues are still coming in strong. Consider that US investment-grade and high-yield bond trading volumes have risen to record levels since the beginning of July compared with previous periods. The activity isn’t just a slight bit more than in prior years; it’s up 21 percent among high-grade notes and 27 percent among junk bonds.
Meanwhile, debt of all types continues to perform well, so most securities that banks happen to be holding in their inventories will only juice their gains.
But before traders pop the champagne and celebrate a new era of lucrative trade, it’s important to note the reason for such a rise in activity. It likely stems in large part from new corporate-debt sales. Bonds tend to be more active in the days after they’re first sold, and company debt is being issued at a record pace.
Investors from around the world have worked themselves into a frenzy trying to get their hands on top-rated dollar-denominated debt, and so have Wall Street bankers, who are elbowing one another out of the way for a chance to shepherd more such debt into the market. Meanwhile, companies seem to be running out of uses to borrow money other than buying back their own shares, which makes some investors a bit skittish. Leverage at nonfinancial U.S. corporations has surged to the highest in 10 years, S&P Global data show. At some point, it seems likely that this rush on bond sales will slow down and traders will return to moving around existing bonds, which are notoriously less active on any given day. And the size of the corporate-debt market is still generally expanding more quickly than trading volumes.
It’s hard to see how debt-trading revenues can continue accelerating without a more significant structural market shift, say to much greater electronic trading. Traders are increasingly using such systems to more efficiently find buyers and sellers. And a growing number of big investment firms are using computer technology to help them find the bonds they’re looking to buy quickly.
But such moves are far from transformative yet. For now, traders are benefiting from a world awash in quantitative easing and the huge amount of debt such policies have encouraged. They should brace themselves for the inevitable comedown that follows the peak.
—Bloomberg View