NEW YORK (CNN/Money) - Profits at Goldman Sachs, Morgan Stanley and Lehman Brothers all showed unexpected strength Thursday as the brokerages' booming fixed-income business offset sluggish investment banking in the first quarter.

The biggest surprise may have been Morgan Stanley, whose profit in its first fiscal quarter rose 6.7 percent, defying expectations for a decline. The rise was the first in 2-1/2 years for Morgan Stanley (MWD: Research, Estimates), which along with its rivals has been cutting thousands of jobs to save money during the stock market's longest slump since 1941.

Morgan reported net income for the quarter ended Feb. 28 of $905 million, or 82 cents a share, up from $848 million, or 76 cents, a year earlier. Industry analysts had forecast 62 cents, according to First Call.

Goldman Sachs (GS: Research, Estimates) said net income for the quarter ended Feb. 28 jumped 26 percent to $662 million, or $1.29 a share, from $524 million, or 98 cents, a year ago. Analysts had forecast 96 cents.

Meanwhile, net income at Lehman Brothers (LEH: Research, Estimates) rose 1 percent to $301 million, or $1.15 a share, for the quarter, from $298 million, or 99 cents, a year earlier. Analysts aexpected 97 cents.

All three New York-based firms credited their fixed-income business for the profit gains. The lowest interest rates in a generation have lured companies and municipalities to sell record amounts of debt, benefiting the firms that underwrite these bonds. Bond trading also has jumped as investors fleeing a falling stock market have poured money into fixed-income securities.

At Morgan Stanley, fixed-income sales and trading net revenue of nearly $1.7 billion was up 48 percent from a year earlier. Goldman's fixed income, currency and commodities business had a record quarter, taking in $1.88 billion in revenue, up 54 percent from a year ago.

Lehman said it posted record bond trading revenue, driven by higher fixed-income volume. It also said it benefited from increased investment grade and high yield debt issuance.

The three brokerages also cited a difficult business climate made worse by the standoff with Iraq. The U.S. began attacking Iraq Wednesday, three weeks into the new quarter for the companies.

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Lehman's Chairman and CEO Richard S. Fuld Jr. said the results came "against a backdrop of ongoing geopolitical concerns, global economic weakness and continued corporate governance issues."

The business of taking companies public and advising on mergers has slumped, while trading volume has slowed along with the size of assets under management.

All this has helped send the Amex Securities Broker/Dealer Index down 23.2 percent over the last 52 weeks.

Morgan Stanley shares were the only ones to move higher Thursday, gaining 27 cents to $39.75. Goldman fell 30 cents to $69.97 while Lehman lost 40 cents to $59.29.

Goldman Sachs, which reported a 20-percent decline in investment banking, cut about 700 jobs, or 4 percent of staff. It still expects to end the year with around 19,700 employees but said there is a chance of further layoffs if business conditions get worse.

"Mergers and acquisition and common equity underwriting and IPO markets remains very weak, with no visible pickup in activity," Goldman Sachs Chief Financial Officer, David Viniar, told reporters on a conference call.

Goldman's investment banking revenue fell to $718 million in the first quarter from $893 million in the year-ago period. Compensation and benefits, a major expense on Wall Street, rose 16 percent to $2.09 billion. Goldman's revenue was $6.09 billion during the quarter.

At Lehman Brothers, net revenues in the quarter rose to $1.7 billion from $1.6 billion a year earlier.

"Robust fixed income markets are playing into Lehman's strength," J.P. Morgan analyst Michael Freudenstein said in a research note Wednesday. He initiated coverage of the company with an "outperform" rating.

"Lehman's business mix matches up better than most of its peers to what the current weak investment banking environment has to offer," Freudenstein said.

At Morgan Stanley, investment banking revenue fell 43 percent to $166 million, due to what the company called "declining levels of global M&A activity."

"This was accomplished in an exceedingly challenging environment characterized by a slumping global economy, declining consumer confidence, and a market consumed by the prospect of war in Iraq," Morgan Stanley CEO Philip J. Purcell and President Robert G. Scott said in a joint statement.  

From staff and wire reports