Introduction to Fixed Income Trading

Evercore closed its European equities execution desk two weeks after MiFID II was implemented, and we’ll continue to see stories like that. I’m then at the desk for almost the entire day until 5 PM, when the market closes, except for ~20 minutes to grab lunch at mid-day. There is no “correct” answer, so make a decision quickly and then spend most of your time outlining your pitch and anticipating the questions you’ll get. Traders won’t have time to meet during market hours and generally won’t be inclined for sit-down meetings – so your best bet is to aim for drinks right after work, especially on Thursday nights. Gilts are the most common, though there are teams for the others as well. The real answer is that there is no real answer – you may get lucky, join a great fund which trains you well, and turns you into a PM, or you may find yourself stuck in execution.

  1. Another notable rendezvous is the Fixed Income & Rates Trading Conference, which focuses on crucial topics like global interest rates, credit markets, and the future of fixed income trading.
  2. Illiquid markets can lead to larger price fluctuations and carry increased risk.
  3. Because of how delicate these issues are, most countries have separated central banks from politics.
  4. The after-work drinking culture is so prevalent in London that you might even be able to network with traders simply by going bar-hopping at the right times.

With a large portion of equity trading volume being automated, there is potential for rates trading to follow a similar path. Rates trading deals with government bonds, interest rate swaps, swaptions, and inflation-protected securities, among other products. This area has traditionally been macro-focused and requires a strong understanding of market dynamics. On the other side, cash markets, also known as “spot” or “money markets,” deal in the immediate trading of financial instruments, such as cash deposits, commercial paper, and treasury bills. The primary goal of cash markets is to ensure short-term liquidity by facilitating transactions between buyers and sellers in real-time.

In this dynamic and fast-paced world, the rate trading community contributes significantly to the evolution and stability of worldwide financial markets. A company with a floating rate loan that does not want to swap to a fixed rate but does want some protection can buy an interest rate cap. Interest rate markets can be accessed in the form of cash or spot, ETF shares, or futures.

Among the most common types of interest rate derivatives are interest rate swaps, caps, collars, and floors. My job is to arrive 5 minutes early into the conference room and dial-in the branch offices. As the most junior trader on my desk, I don’t actually get to sit in the conference room.

Understanding Rates Trading

However, it is worth doing a bit of research beforehand on possible hedges so you can answer follow-up questions if the interviewers ask you about the topic. Becomes a weaker connection than it is in the U.S., so just going to the same university as a senior trader usually doesn’t cut it. Gilts, U.S. Treasuries, EUR-denominated bonds issued by European countries, and Australian Government Bonds (AGBs).

Credit Trading and Liquidity

But if you enjoy flow, enjoy constantly interacting with folks, and are interested in monetary policy then rates is a phenomenal place to be. If you are looking for a desk that has a slower-pace, where you have space to think or lulls in the day, then rates trading is not for you. Another common exit from rates is simply to move to a different bank, but with a higher title and higher-level of compensation.

High inflation is causing some of the largest price extremes, bond and forex markets have seen in decades. Trading interest rates with mean reversion would contend that the trader buys interest rates when they are below their average and sell them when they are above their average. The bond market is more exposed to interest rates than stocks because bonds are debt. Therefore, if interest rates rise, it means that a country or a government will need to adjust their policies to meet the new rates. Talking about currencies, instead, borrowing a low-yielding currency and investing in high-yield currencies is  very important for carry trading strategies. The rule of the thumb is that a central bank will slash interest rates when the economy is struggling and raise rates when things are going on well.

A day in the life of a rates trading analyst

As a result, the role of rates traders might evolve to focus on creating more value-added strategies and managing relationships with counterparties. In the world of rates trading, sales and trading teams work closely together to fulfill their respective roles. Sales teams focus on building relationships with clients and pitching financial products or trading ideas. They communicate with clients to understand their needs and preferences, ensuring that the trading desk is well-informed of the clients’ expectations. As an essential part of the global trading ecosystem, rates trading offers myriad opportunities for market participants. Traders working in this domain collaborate with research analysts to effectively make decisions, helping clients capitalize on shifts in economic conditions.

These are the kinds of questions you may get if you’re entering into a fixed-placement over the summer at a bank like J.P. Morgan (see J.P. Morgan S&T interview questions here) or are applying as a full-time analyst. Occasionally you will see money markets and mortgage-backed securities trading be put under the “rates trading” umbrella. Normally, however, these areas are considered to be distinct desks on their own and we will cover each of these areas in future posts (since they have substantially different dynamics than rates). “Cash” here means sovereign bonds, while “derivatives” means interest rate swaps and futures, and “exotics” means structured products based on rates, options on swaps, and others.

Hedge funds and other financial institutions participating in rates trading closely track changes in economic data to make informed decisions on trades involving bonds and interest rate derivatives. This is critical, as unexpected changes in inflation or growth can impact the pricing and fluctuations of traded assets. Rates trading, essentials of health care finance a significant aspect of global financial markets, primarily involves the buying and selling of interest rate products such as government bonds and U.S. In the United States, the prevalent market for rates trading centers around U.S. Treasuries, which are considered among the safest and most liquid financial instruments.

As previously mentioned, Credit Trading is more based on micro analysis such corporate bonds and credit default swaps. Here the futures contract exists between a buyer and seller agreeing to the future delivery of any interest-bearing asset, such as a bond. The interest rate future allows the buyer and seller to lock in the price of the interest-bearing asset for a future date.

In summary, a career in rates trading offers a challenging and rewarding opportunity for those with a strong analytical mindset and the ability to react to market dynamics quickly. With the right skills and preparation, young professionals can find success in this exclusive area of the financial industry. For markets like the US treasuries these jobs are sometimes sub divided into different groups, not 100% if the EMs teams will do this though. Check out our recruiting guide with over 814 questions from 165 hedge funds crowdsourced from over 500,000 members. The WSO Hedge Fund Interview Prep Course has everything you’ll ever need to land the most coveted jobs on the buyside.