Analysts expected banks' bond trading revenue to have fallen somewhere around 20 percent in the second quarter from the same period last year. But the drop in aggregate for Bank of America Corp, Citigroup Inc, Goldman Sachs Group Inc, JPMorgan Chase & Co and Morgan Stanley for fixed-income trading was closer to about 10 percent.

Investors and analysts are spending a good deal of time watching banks' trading businesses because these units have a big impact on their earnings.

April and May were slow months, with JPMorgan and Citigroup both saying in May that their second quarter trading revenue would drop. But June was a more active month. The European Central Bank cut interest rates and announced other initiatives to further loosen monetary policy. Ukraine was relatively calm, and U.S. jobs grew at a healthy pace, all spurring shifts in the outlook for interest rates and the broader global economy.

The summer months of July and August tend to be a slower season compared to other quarters.

JPMorgan Chief Financial Officer Marianne Lake said on a Tuesday conference call with analysts that executives had seen "no catalyst that would lead us to believe that (the pace of trading) would, necessarily continue. And as we have moved into July, it so far has been our experience that it has not continued at that level."

In recent days, trading volume has picked up, as fighting has intensified in the Gaza strip and a Malaysian airliner was downed in Ukraine. With these tensions ratcheting higher, investors bought Treasuries on Thursday and Friday.

But even if macroeconomic changes spur more activity, there are longer-term pressures on bond trading that will likely prevent volume from rising too much, executives said.

New rules for leverage and liquidity give banks an incentive to hold fewer bonds that trade infrequently on their books. That may cut into trading volume.

"If you think about balance sheets, they're getting squeezed on two ends," Morgan Stanley Chief Financial Officer Ruth Porat said in an interview.

David Ellison, a portfolio manager at Hennessy Funds, said it is wise to avoid banks with too much exposure to the business because their profits are too hard to forecast. He is looking instead at regional banks that focus on traditional activities like lending.

"You want to own the traditional banks" because those institutions stand to benefit more from an improving economy and are less prone to risky trading, Ellison said. "You want to move away from risk and leverage of Wall Street."

(Editing by Bernard Orr)

By Peter Rudegeair