Goldman Sachs experienced losses on specific rates positions near the end of the first quarter after significant volatility in fixed-income and currency markets, two people familiar with the situation told Reuters. The instability, linked to the conflict with Iran, left the bank holding certain positions as a market maker when market moves turned against them.
The firm's fixed income, currencies and commodities (FICC) division reported revenue of $4.01 billion for the first quarter, down 10% from the prior period, when Goldman disclosed its earnings on Monday. The decline reflected weaker activity in interest rate trading, mortgages and credit products, the bank said.
That performance contrasted with several of its large peers. JPMorgan Chase reported that fixed-income market revenue rose 21% to $7.1 billion. Citigroup and Morgan Stanley also posted strong gains in their fixed-income operations, while Bank of America recorded modest improvements in its fixed-income trading business.
The two individuals who discussed Goldman’s weaker FICC results spoke on condition of anonymity because the precise reason for the shortfall had not been publicly disclosed, and the development had previously been reported by the Financial Times.
Goldman serves as a major global market maker, supplying liquidity and continuously quoting buy and sell prices across equities, FICC and derivatives. That role requires the firm to carry positions through turbulent stretches when counterparties are seeking to trade, sometimes leaving the bank exposed to abrupt directional moves.
Addressing the FICC outcome at a Semafor conference in Washington, Goldman Sachs President John Waldron emphasized his confidence in the business despite the quarterly setback. "You can get in traffic where things don’t go your way at any given moment in time," he said. "You know you have to end the quarter at a certain date and you show what happened. If you look at it in the fullness of time, I have no concerns about our FICC business. Our FICC business is very strong."
Market participants said currency and government bond markets became considerably more volatile in the quarter after the conflict with Iran prompted an energy shock and prompted investors to revise a previously dominant expectation that major central banks would cut interest rates this year. A jump in oil prices and broader uncertainty about inflation and growth led to a swift repricing across rates and foreign exchange markets.
Analysts and investors increasingly warned that policymakers might remain on hold for longer, or even adopt a more hawkish stance, if the energy shock proved persistent, further complicating assumptions that had underpinned trading strategies earlier in the year.
Mike Mayo, a banking analyst at Wells Fargo, said Goldman has a heavy exposure to macro and rates trading and that big market moves in March were not uniformly favorable to the firm. "Goldman is quite heavy in macro in rates and there were some big changes in the month of March and they’re not always going to be on the right side of every trade," Mayo said. "One quarter like this from Goldman can be partly excused away. If they have another quarter like this, people will start to connect the dots."
Bottom line: Sudden geopolitical-driven market swings forced a leading market maker to carry positions through a turbulent period, contributing to a notable quarter-on-quarter fall in FICC revenue while competitors recorded gains.