Goldman Sachs today reported a 21% drop in quarterly profit as revenue from fixed-income trading fell.

The bank's chief executive Lloyd C Blankfein described trading in the quarter as "a somewhat challenging environment."

Net income applicable to common shareholders fell to $2.25 billion, or $4.60 per share, in the fourth quarter from $2.83 billion, or $5.60 per share, in the same quarter of 2012, the Wall Street bank said today.

Analysts had expected earnings of $4.22 per share, according to Thomson Reuters I/B/E/S.

The bank was stung by its heavy reliance on the bond market, which historically has been a source of great profit.

The bond market began to soften in the fourth quarter as investors prepared for higher interest rates, a shift that affected trading, underwriting and investment income for Wall Street banks.

Goldman's revenue from client trading in fixed income, currencies and commodities (FICC) dropped 15% in the three months to $1.72 billion.

Revenue from bond underwriting dropped 14% to $511m, while revenue from Goldman’s own loans and debt investments fell 13% to $423m.

FICC trading had arguably been Goldman’s strongest business in the decade leading up to the financial crisis, with the bank raking in billions of dollars from the credit boom and bust.

But it has come under increasing pressure due to new regulations that restrict activities such as proprietary trading and others that make it more expensive for banks to trade or hold securities on their balance sheets.

While Goldman is still a big player in bond markets, FICC trading revenue fell to 25.3% of total revenue in 2013 from 48% at its peak in 2009.

Overall, Goldman's revenue dropped 5% to $8.78 billion compared with a year earlier.

The cost of compensation and benefits rose 11% to $2.19 billion during the quarter, which is when Wall Street banks make final decisions about bonuses.

For the year, compensation and benefits expenses fell 3% to $12.61 billion. Goldman paid out 36.9% of its revenue to employees in 2013, the lowest level since 2009.

Goldman’s return-on-equity, which measures how much profit it wrung out of its balance sheet, was 11% for 2013 - higher than the 10% minimum that analysts say banks must produce to meet their cost of capital, but well below the 30% returns Goldman generated in its prime.

The bank's equity businesses also turned in mixed results.

Revenue from client stock trading fell 22% to $598m despite stocks hitting new highs, while equity underwriting revenue doubled to $622m as more companies tapped the market for capital.

The bank’s own equity investments delivered a 25% increase in revenue to $1.40 billion.

The stock market resurgence also helped Goldman’s investment management business, which provides advisory services to wealthy clients and manages money through funds. That business reported a 5% rise in revenue to $1.60 billion in the fourth quarter.

Goldman led the high-profile initial public offering of Twitter in the fourth quarter, which alone delivered an estimated $23m in underwriting fees. Revenue from advising on mergers and acquisitions rose 15% to $585m, although overall M&A activity declined in 2013.

There has been a resurgence in recent weeks, however. Other Wall Street banks have reported healthy backlogs of activity, signaling that the business may be turning a corner after several years of decline.