Wall Street banks are having a live-by-the-sword, die-by-the-sword moment with their trading desks.
Until the last month or so, the hot-running economy and AI financing boom were fueling ever-rising activity for both bond and stock traders. Meanwhile, more traditional regional banks were facing questions about tepid loan growth and intense deposit competition. So, over the past two years, the KBW Nasdaq Bank index has risen over 17% annually, more than double the smaller-bank regional bank index.
Yet thus far this week, the KBW Nasdaq Bank index is off by 2.4%, versus a 0.6% drop for KBW's index of smaller regional banks. One major reason: Big bank earnings this week revealed that fixed-income trading desks' revenues were hit by September's surge in yields. The settling reality of even-higher-for-even-longer interest rates was further underlined by Wednesday's hot inflation report.
While price moves can be good for banks when they lead to more trades, sharp and sudden plunges in the price of bonds can hit their trading inventories, and also cause clients to step back. For example, higher rates mean fewer new mortgages, which translates into less demand for facilities where clients park loans before securitizing them.
The upshot was that fixed-income, currencies and commodities revenue fell around 4% in the third quarter from the same period in 2025 across Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo.
Even if things were to steady out, banks still likely face tougher resource choices in the quarters ahead. Rising yields can also eat into banks' regulatory capital via lower marks on the banks' own portfolios of bonds.
Indeed, Wall Street banks could be nearing some limits on how much more resources they can realistically plow into trading, having already sunk an additional trillion dollars or so into trading-related assets. A lot of that was enabled by a buildup of excess capital in the past, back when the Federal Reserve was considering some bigger increases in capital requirements than current proposals.
The six biggest Wall Street banks have lowered their core regulatory capital ratios, which measure common equity Tier 1 capital as a percentage of risk-weighted assets, by roughly a percentage point on average over the past year. They have also on average increased their overall leverage.
Trading may now face a higher hurdle for additional resource allocation. That is especially the case if profitability is challenged, for example because it is harder to make markets when prices are swinging wildly, or if fewer clients want to trade.
In reference to a question about potentially reducing resources allocated to trading desks, Bank of America Chief Executive Brian Moynihan told analysts on Wednesday: "We expect it to continue to grow, but they've got to get the returns as they're growing. And when customers stop cold like they did last quarter, that happens."
Rising rates do offer upside elsewhere, especially in a potential pickup in net interest income. That can grow as loans grow, as older bonds in banks' investment portfolios mature and roll into higher yields, and as yield earned on assets picks up faster than interest paid on deposits and other funding. Freed up capital from trading could be allocated to other businesses if the returns are higher.
Bank of America has raised its expectation for net interest income growth for 2027 to 8% or more over this year. JPMorgan preliminarily projects its own net interest income, excluding its volatile markets business, could rise by around $10 billion from what is expected in 2026 to 2027. Those are good signs for regional banks, which generally rely much more on lending.
There is also some debate about the trading outlook for the fourth quarter. JPMorgan Chief Executive Jamie Dimon suggested on his bank's analyst call that he personally thought the fourth quarter might defy the usual seasonal slowdown. "There's too much going on in the world," he said.
One thing to watch is whether anything should happen to disrupt banks' still-hot equities trading units, which in the third quarter collectively grew revenue more than 40% from a year prior. If sharply higher bond yields finally start to shift investors out of stocks, that could ripple through banks' stock trading or prime brokerage desks, which provide financing to trading clients.
So while it may have felt like the case for several quarters, investors can't count on banks' trading desks to always ride to the rescue.
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