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Breaking views: Till the bulls come home

Source: www.breakingviews.com is Europe's leading financial commentary service

Date: September 6 2003

By Jonathon Ford


The roaring bull market in bonds enabled investment banks to make pots of money in the first half of this year. How vulnerable would their profits be were the fixed-income bonanza to end?


Investment banks would certainly feel some pain if there was a downturn. Fixed income has come to constitute a massive slab of their total income. In the first half, the eight largest investment banks (excluding Citigroup and Merrill Lynch for which data are not available) made more than half their revenues from bonds. Two years ago, the figure was more like a third.


What is more, a fall-off does seem close at hand. Since the end of the first half, there has been a huge sell-off in US treasuries, checking the tremendous bull run in dollar-denominated bonds. Making money from fixed income in the second half will be harder, not easier. UBS has already acknowledged this. The Swiss bank's chief executive, Peter Wuffli, has warned that revenues are likely to dip over the balance of the year.


So how big a revenue drop might the banks face? It depends, of course, on what happens to the markets.





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