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11 08 2015 | by Victor Xing | Capital Markets

What is fixed income trading?

Fixed income trading consists of transactions involving bonds or bond derivatives of with fixed cash flow or variable cash flow.

The issuers of these bonds can be either domestic, foreign, or quasi governmental agencies

  1. U.S. Treasury bills, notes, bonds (including TIPS and floating rate notes or FRNs)
  2. Derivatives such as swaps and futures (Treasury futures, Bunds futures, and so forth) – futures are traded on exchanges
  3. Securitized products (many of which are amortizing instruments), such as agency Mortgage-backed security (MBS), non-agency MBS, Commercial mortgage-backed security (CMBS – such as cash flow backed by an office tower in downtown Austin or a fancy Southern California high-end mall), Asset-backed security (vehicle rental fleet, credit card, student loans, etc)
  4. Bonds issued by U.S. and foreign corporations, with investment grade or high-yield ratings (Credit default swap and CDX being credit derivatives).  There are also short-term instruments such as commercial paper
  5. Bonds issued by U.S. municipal entities (state, county, city) as well as municipal utilities such as Los Angeles Department of Water and Power.  Puerto Rico debt is also part of the Muni sector
  6. Foreign sovereign bonds (Ethiopia or Greek debt), as well as dim sum bond and foreign bonds denominated in USD
  7. Debt issued by regional and international developmental organizations, such as Asian Development Bank, European Investment Bank, International Bank for Reconstruction and Development, etc
Fixed income trading desk, Victor Xing
A day on the fixed income trading desk – T-shirt from the President of the San Francisco Fed

Majority of the above instruments (besides futures and options) are traded over-the-counter, reasons why West Coast financial institutions have to match East Coast banking hours (8am ET) instead of stock exchange hours.  This is also why sometimes stocks markets close but bonds are still trading.

Liquidity profile of various bond instruments vary, and it deserves its own topic or discussion.

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