Fixed-income: Big revenues don't mean big bonuses

Following a healthy quarter, fixed income salespeople and traders may feel the urge to splash out on long and luxurious holidays this summer. Their optimism could be premature

When Morgan Stanley reported its second quarter results yesterday, it revealed a 95% increase in fixed income sales and trading revenues over the second quarter of 2005. The fixed income sales and trading divisions of Goldman Sachs and Bear Stearns appear to have had a similarly bounteous three months, with revenues rising 184% and 44% respectively.

Who are likely to be the winners in the latest iteration of the fixed income boom? Commodities traders are a no-brainer. David Reynolds, head of the fixed income division at search firm Sheffield Haworth, also highlights the growing success of inflation-linked derivatives traders, who have seen revenues grow on the back of fears that inflation could be about to make a comeback.

By comparison, Reynolds says other credit derivatives specialists are doing less well as revenues are compressed by falling margins. And emerging markets teams are in the doldrums following recent declines in local stock markets.

But Reynolds cautions that rising revenues for fixed income sales and trading divisions are in themselves no guarantee that bonuses will increase commensurately. Nor are rising profits.

At least some of the increase in revenue at the likes of Morgan Stanley can be attributed to long term swaps generated by the firm's asset liability management division, says Reynolds, a revenue stream associated with the firm's broader business franchise rather than with the activities of individual salespeople or traders.

He also points to the likes of Citigroup and BNP Paribas, which performed well in fixed income sales and trading last year, but didn't pay up to meet expectations: "Fixed income markets are doing very well, but credit markets are not doing well, equity markets are not doing well and emerging markets are not doing well. You need to look at the business as a whole."

And last but not least, Reynolds says banks are becoming more discerning about who they award big bonuses too: "People who are really adding to the bottom line will get paid. But those who are not business critical will suffer."

That puts an end to those holiday aspirations then.