By Saabira Chaudhuri 

Jefferies Group LLC added to the gloom surrounding banks' fourth-quarter trading revenues, on Tuesday reporting a steep drop in fixed-income revenue while investment banking also fell.

Jefferies, seen by some as a harbinger of results for other Wall Street firms, reported a 73% slump in quarterly fixed-income revenue as the firm was hit by a decline in the value of distressed securities.

Overall, the investment-banking unit of Leucadia National Corp. reported it had swung to a loss in the quarter ended Nov. 30 as revenue fell 43% from a year earlier.

After a pickup in client activity during the third quarter that translated into stronger-than-expected trading revenue, big banks are again grappling with a challenging trading environment that is expected to hurt results when they report earnings next month.

Last week, Bank of America Corp., Citigroup Inc. and J.P. Morgan Chase Co. all offered weak outlooks for trading revenue in the fourth quarter, showing that a burst of activity for trading last quarter may not carry over as much as some investors hoped.

Jefferies meanwhile said it is considering a possible sale or joint venture for the commodities and financial-derivatives unit it bought from Prudential Financial Inc. just three years ago. The unit has faced growth and margin challenges. Other banks have also been retreating from commodities for both regulatory and financial reasons.

"We experienced a very challenging fourth quarter," said Jefferies Chief Executive Richard Handler. "Heightened volatility from mid-September through mid-November and a tepid trading environment throughout the quarter led to poor fixed-income results."

Jefferies also reported softer investment-banking revenue of $316 million, down 24% from a strong year-earlier quarter as deals were delayed amid what Mr. Handler described as "unsettled markets."

The investment bank's results are considered by some to be indicative of how other Wall Street investment banks are doing. Jefferies's quarter ends one month earlier than other banks, but December has also featured rocky trading conditions and falling stock prices.

Jefferies reported fixed income revenue of $61.4 million, down from $227.1 million a year earlier. Much of that decline stemmed from an $84 million drop in trading revenue after the firm was forced to mark down the value of its inventory following a selloff in distressed securities.

The selloff, Jefferies said, came after a court in September dismissed claims brought by a group of Wall Street investors against the federal government for sending nearly all profits generated by Fannie Mae and Freddie Mac to the U.S. Treasury. A drop in oil prices, which have fallen about 50% since June, also contributed to the firm's trading woes, said a person familiar with Jefferies' business.

Jefferies had to mark down securities issued by Freddie and Fannie, and those from energy and transport sector issuers and some high yield municipal issuers. The New York investment bank isn't subject to the same level of stringent regulation as its larger rivals, making it more able to hold riskier securities, according to Wall Street analysts.

The "unsettled markets" also led to deal postponements, Jefferies said, hurting the firm's investment banking business. Revenue in that business, which includes merger advice and underwriting, fell 24% to $316 million. In its release, Jefferies also referred to a divorce proceeding of one of its senior bankers, saying that any impact from the "unusual publicity" surrounding the matter "was immaterial."

JMP Group analyst Devin Ryan said other banks may have better investment banking results in the quarter. "Investment banking broadly is still a positive theme," he says.

While fixed-income revenue is widely expected to be down for the industry, the drop is unlikely to be as steep as what Jefferies' reported, Mr. Ryan added, since the firm "is a bit more levered to some of the more distressed and high-yield businesses" than its larger rivals.

J.P. Morgan expects its markets revenue to be down in the high-teens from a year ago, or 4% on a core basis. Bank of America estimates its fourth-quarter trading revenue will be lower than both year-ago levels and the third quarter's, while Citigroup has said markets revenue would be down year-over-year by about 5%.

Jefferies's quarterly results released Tuesday don't include December, a month Mr. Ryan characterizes as "challenging on the trading front with high yield spreads continuing to blow out in recent weeks."

Jefferies on Tuesday said it is in talks with third parties about a potential combination of its commodities and financial-derivatives unit, known as Bache, with a similar business to improve its competitive standing.

Overall, Jefferies posted a loss of $92.4 million, compared with a year-earlier profit of $109.9 million. The results included a $52 million goodwill write-down and an $8 million write-down, both related to the Bache business. They also include a $52 million bad-debt provision tied to Danish fuel-supplier OW Bunker, which Jefferies provides futures clearing and execution services to, and which last month filed for bankruptcy.

Chelsey Dulaney contributed to this article.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

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