March 21, 2017

Bellwether permitting

by Breakingviews.

Jefferies just gave Wall Street a bit of reassurance. The investment bank housed inside the $9 billion conglomerate Leucadia National revealed that it more than doubled revenue in the three months ended Feb. 28 thanks to its fixed-income trading and underwriting operations. The first batch of 2017 results suggests that with the Federal Reserve’s tightening and the yield curve steepening, trading engines across the industry should be firing on many cylinders.

Buying and selling stocks and bonds alike powered the performance at Jefferies. Revenue from the business nearly septupled, to $379 million from a year ago. The business of advising clients also picked up notably from the first quarter of 2016, but was roughly flat from the previous three-month stretch ended Nov. 30.

Bank investors have been growing increasingly excited since Donald Trump was elected president. JPMorgan and Citigroup have helped those expectations with recent comments that trading revenue would see some modest uplift. The results at Jefferies suggest that fixed income, currencies and commodities business could be even better than what’s being anticipated.

The Federal Reserve has raised its benchmark interest rate twice in the past three months. That has helped the spread between two- and 10-year Treasuries widen to 1.16 percent from 1.01 percent on Nov. 7. Morgan Stanley analysts, meanwhile, just laid out a view that excess capital and deregulatory movements will turn the tide for fixed-income trading. They predict industry-wide revenue will grow as much as 5 percent a year over the next five years.

Optimism abounds. The KBW Nasdaq Bank Index has swelled by 25 percent since early November. Shares of Goldman Sachs, JPMorgan and Morgan Stanley are up even a little more than that. Jefferies just kept the momentum going.

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