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A Barclays branch in London.TOBY MELVILLE/Reuters

Staggering declines in fixed-income revenues at so many global investment banks have investors wondering why financial behemoths are suffering from the same sudden reversal of fortune.

Just before the financial crisis, and immediately after it ended, the fixed-income arms of major dealers such as Deutsche Bank and Citigroup brought in hundreds of billions in revenues annually. Halfway through 2013 the tables turned, and over the past few quarters the outlook has quickly deteriorated.

When the big U.S. investment banks reported their first-quarter earnings in April, most saw revenues from their fixed income, currencies and commodities (FICC) units plunge 15 to 20 per cent from the year prior. Barclays PLC exacerbated the trauma when reporting its latest quarterly profit Tuesday, announcing FICC revenues fell a jaw-dropping 41 per cent from a year before.

To dissect the industry's woes, research analysts at Morgan Stanley and consultants at Oliver Wyman assembled a detailed report on the future of fixed-income trading. Its findings were bleak. "Fixed income is in the midst of profound change," the report noted, adding that there is an "urgent case for change."

The report pinpointed areas under the most stress. Of all the products that fall under the FICC classification – everything from commodities to government bonds to foreign exchange – it is rates trading, comprised of government bonds and interest-rate swaps, that is suffering the greatest shock.

Across the industry, rates-trading revenue fell to roughly $35-billion (U.S.) last year, down from $83-billion in 2009. Securitized products, such as packaged auto and home loans, have also taken substantial hits.

As for why, the answer isn't so clear cut. Among the largest factors is the Federal Reserve's retreat from quantitative easing. Many fixed-income products saw their values rise as the Fed scooped up Treasury bonds, which put pressure on yields – bond prices move in the opposite direction of yields. Investors have not reacted rationally to the program's unravelling. Instead of making directional bets on bond prices, many clients are sitting on the sidelines.

New leverage ratio rules have also tied the hands of many investment banks. Historically, these dealers only had to worry about holding capital against their riskiest assets; many could also keep derivatives off their balance sheets. New global rules require them to hold minimum capital levels against all their assets, regardless of their risk; they must also bring many derivatives onto their balance sheets, meaning capital must be held against them. In response, most banks have shed assets, leaving them with fewer products to make money on.

Competition has pus more pressure on the bottom line. During the good times, investment banks rushed to expand their fixed-income operations, adding traders and fixed-income specialists. Today they are all competing for what can feel like scraps.

Yet many of the banks' cost structures remain bloated. "There is too much capital and cost tied up in areas where client payback will be low," according to the research report.

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Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 4:10pm EDT.

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Citigroup Inc
+0.78%63.24
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Morgan Stanley
+0.71%94.16

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