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A Royal Bank branch on Bay Street in Toronto on Aug. 2, 2013.Gloria Nieto/The Globe and Mail

Last quarter it was Europe, this quarter it's the U.S.

When Royal Bank of Canada reported second quarter earnings in May, one of the big standouts was just how poorly its European trading arm performed. (The sovereign debt crisis has made Europe a tough market to manage for a few years; in July RBC shut its European government trading desk.) In the third quarter there was another fixed-income problem, but this time it emerged in the U.S.

Even though fixed-income results in Canada were relatively strong and London performed decently – RBC does not break out individual numbers – its U.S. arm was badly bruised.

"What we had in the U.S. was a very significant asset re-pricing," Mark Standish, co-chief executive officer of the bank's capital markets arm, said on a conference call. "It really started in late May when the fed hinted at the reduction [in quantitative easing]."

"Quite frankly, the only hedge in that environment is just to not have inventory," he said.

However, RBC didn't have the luxury. While it did its best to navigate through the storm, its strength in municipal bonds put the bank in choppy waters.

The problem is that RBC had lots of it – particularly municipal bonds. "We have a disproportionately large municipal business," Mr. Standish said, adding that it garners a top-five ranking south of the border. On top of that, RBC had just underwritten a number of mini issues right before the bond markets blew up.

"The outflows in the municipal market were quite extreme," he said. The broad selloff over a five-day period was "the worst we've seen in 30 years."

(Tim Kiladze is a Globe and Mail Capital Markets Reporter.)

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