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Summary The benefit to investment banks will likely be more muted.
Wall Street could make $100 million from the Federal Reserves next bond market maneuver, but that is considerably less than the gains from prior Fed actions.Because the central bank is not contemplating steps that would increase the money supply, the benefit to investment banks like Goldman Sachs Group Inc, Morgan Stanley and JPMorgan Chase & Co will likely be more muted.The Fed is considering intervening in the bond market to lower long-term interest rates in a move known as Operation Twist. According to Rick Spear, who advises Wall Street banks on strategy at consulting firm Novantas, the effort could boost Wall Street trading revenue by $100 million through the Feds direct purchases, as well as a ripple effect from other bond investors activity.That is piddling compared with the $23 billion of quarterly trading revenue that global banks averaged from 2000 through 2010, according to Oppenheimer Research, and compared with the $1 billion of extra revenue that Spear estimates Wall Street received from the second round of quantitative easing.For the first two rounds of quantitative easing, the Fed was expanding the money supply by buying billions of dollars of bonds. The purchases translated to new money sloshing around the bond markets, which supported overall trading activity beyond the Feds purchases.Both rounds of quantitative easing coincided with relatively strong trading profit for Wall Street, with the biggest benefit coming from the first round, when the Fed was buying a wider array of products.For Operation Twist, the Fed would be selling shorter-term Treasury notes on its books and using the proceeds to buy longer-term debt, which would decrease long-term yields. Cheaper long-term borrowing rates could potentially spur more borrowing in the economy.But without new money, the benefit to banks could be limited to profits from trading with the Fed, traders said. Given that buying and selling Treasuries is a low-margin business, even big trades from the U.S. central bank would not help much.
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