That is the view of Brad Tank (pictured), chief investment officer for fixed income at Neuberger Berman.
In a comment piece, Tank said the scenario that unfolded at the end of 2018 would historically have led to a healthy period of activity by major banks. However, this was far from the reality.
‘Fourth-quarter earnings reports reveal that, at Bank of America, fixed income trading revenue was down 15%. At Citi, it was down 21%. JPMorgan, which posted its worst bond-trading quarter since 2008, saw revenues fall 18%, the same decline experienced by Goldman Sachs and Morgan Stanley. Deutsche Bank’s slumped by 23%.
‘I cannot recall a period of similar volatility in bond markets that was followed by such poor trading results. Colleagues trading for our bond portfolios confirm what these numbers suggest: the Street closed up shop through December, and virtually all trades had to be executed on an agency basis.’
Tank cited seasonality as one factor but also said that structural changes which have come into effect since the financial crisis are more significant. He said that banks’ ability to warehouse securities and deploy balance sheet liquidity is now a shadow of its former presence.
‘While on average dealers reported decent trading volumes for the quarter, given all that was happening in the markets, it is easy to argue that they should have been substantially higher.
‘Unwillingness to trade was probably due to a combination of banks trying to preserve what for most had been a pretty good year with a stock market unwilling to reward risk-taking, evidenced by declining price-to-earnings multiples throughout 2018,’ he said.
Tank said that the first signs of this shift were evident at the start of 2016, when liquidity became a much-discussed topic. ‘Three years later, it is clear that financial markets were flashing false signals. As they flashed, more investors tried to sell into illiquid markets, and the signals flashed more urgently.
‘Bouts of volatility will likely be more frequent and violent, therefore, and that means economic forecasting models built on financial market indicators are now likely to be wrongly calibrated.’