Weak Bond Trading at Jefferies Prompts Wider Concern The recent turbulence in the markets has already taken its toll on one Wall Street firm. Now, investors and analysts are trying to gauge whether other investment banks have been hurt by turmoil in the bond markets. The Jefferies Group on Tuesday reported unexpectedly weak bond trading results for its second quarter, which closed at the end of May. Though Jefferies is not as large as Goldman Sachs or JPMorgan Chase, it is an experienced bond-trading firm that weathered the severe storms that have buffeted markets since the financial crisis of 2008. It was no surprise, then, that Wall Street shuddered a little after Jefferies reported second-quarter fixed-income revenue that was down 27 percent from a year earlier. Fixed-income departments trade bonds, currencies and commodities, as well as lucrative financial instruments called derivatives that are linked to those assets. Wall Street firms are heavily reliant on fixed-income revenue, more so than trading in stocks. Last year, 29 percent of Goldman's overall revenue came from fixed-income trading. But a jarring shift has been occurring in the fixed-income world since the Federal Reserve signaled that it might start reducing its monetary stimulus this year. Since the crisis, the Fed has injected money into the financial system and economy through the bond market, which supported a strong rally in bond prices. But, in anticipation of a change in the Fed's stance, investors have dumped bonds, causing their prices to plunge. The challenge for Wall Street firms is how to continue to generate fixed-income profits in this environment. On Tuesday, Richard B. Handler, chief executive of Jefferies, indicated that might be difficult. In a news release, he said that concerns about a Fed pullback had "led to subdued fixed-income secondary volumes and opportunities," adding that "the fixed-income trading environment can best be characterized as tepid and cautious." For now at least, the view on Wall Street is that Jefferies is an exception. Some analysts contend that when larger firms like Goldman and JPMorgan report their second-quarter results in mid-July, they will be healthy despite the current instability. That is because the commotion in the bond markets today is different from other difficult periods. Wall Street firms suffer when clients greatly reduce trading. That can happen when political turmoil creates major uncertainty about the future, like the events in Europe a year ago, or when investors fear bond prices could have a long way to fall, as in the financial crisis. But, today, the bond markets appear to exhibit the "right" type of volatility, some analysts said. Investors are busy adjusting their portfolios for a world in which interest rates rise, selling some bonds and buying others. This trading goes through Wall Street firms, bolstering their revenue. "During that process, you are seeing the fixed-income divisions doing very nicely," said Brad Hintz, an analyst who covers Wall Street firms for Bernstein Research. They are doing well as their clients position themselves for higher interest rates. Big bumps still are possible along the way. Certain types of bonds can be hard to sell quickly. In the past, certain firms racked up big losses because they were overly exposed to bonds that fell steeply in price. "Banks got so entrenched in the way interest rates were," said Paul Gulberg, who analyzes investment banks for Portales Partners. So, if you get a big change, somebody may get a significant shock. Mr. Gulberg agreed that, in the second quarter, certain types of fixed-income revenue will be strong. One leading indicator is the amount of fixed-income derivatives that have been traded on exchanges. It was up a lot in May and may reflect an increase in trading activity at Wall Street banks themselves. But Mr. Gulberg said the exchange figures did not shed much light on what might be happening to the type of fixed-income trading that was most profitable for the banks. Higher interest rates may dent that business, he said. Another way in which fixed-income revenue can be diminished is if companies stop issuing so many bonds through Wall Street firms. That, of course, would lead to lower deal fees, but it could also weigh on trading activity, Mr. Gulberg said. While all eyes will be on the second-quarter results of Wall Street firms, Mr. Hintz contends that it is important to assess what would happen to revenue in a longer-term increase in interest rates. As clients adjust to the new environment, revenue might benefit initially. But bond traders could soon face leaner years, according to an analysis by Mr. Hintz that compares interest rates with Wall Street revenue back to 1980. "You get higher interest rates, you get lower fixed-income revenues," he said. The numbers are about as statistically clean as they can be.