One of the major risks we previously flagged in fixed income markets is contributing to the challenging results coming out of the leading investment banks this week. With Value at Risk representing an indication of liquidity in bond markets having been in dramatic decline over the past 3 years, it isn't surprising to us that the fixed income businesses of JP Morgan, Citigroup, and Goldman Sachs reported negative year over year results this week.
While JP Morgan’s negative 8% revenue result year-over-year in fixed income trading was manageable, the surprising 44% year-over-year decline at Goldman Sachs was shocking.
Click here to watch the HedgeyeTV video "Bond Bear Market: Just Beginning."
With dealers getting dinged in fixed income trading, this may cause even less capital to be committed going forward by brokers to trade bonds which can continue to exacerbate year-to-date negative returns in bonds.
We recommend that investors continue to reduce overall exposure to fixed income, and to incrementally add to stock portfolios on pullbacks as we outlined in prior calls.