Top 5 Reasons to Choose a Fixed Income Trading Career

People familiar with the investment banking industry are more likely to have at least a working knowledge of stocks and stock markets. Many people entering investment banking find themselves working as a trader on a stock desk, trading a company’s stock or different types of derivatives on those stocks. Ask people about “fixed income trading” and you’ll probably get a few blank stares. However, there are several excellent reasons to consider fixed income trading over equities when considering a career in investment banking.

Fixed Income Trading

The Global Markets division of an investment bank generates revenue by executing agency transactions and creating markets. Agency trades are buy or sell orders executed by a trader at a Global Markets desk on behalf of a client. Placing these agency orders on behalf of clients generates fees for the investment bank. These clients are usually institutional investors such as asset managers, pension funds, insurance companies or hedge funds. Agency transactions are executed on an exchange, with other investment banks, or a specialist trader or broker.

Market making means that a trader on a Global Markets desk simultaneously announces bids and offers (also called asks) for a specific asset to the market. The income generated by market making corresponds to the difference between the bid price and the ask price, called the spread.

Fixed income securities transactions do not occur on exchanges like many equity transactions, because fixed income securities markets are over-the-counter or over-the-counter. This means executing fixed income agency transactions with other traders, brokers or dealers. It can also be market making.

To see how bond market making works, consider an asset management client who wants to sell 10,000 corporate bonds. Each bond has a face value of $1,000. The fixed income market maker knows that these bonds are trading at a discount and therefore quotes a bid-ask spread of $970 to $990.

If the asset management client decides to fill their sell order with the market maker, they “hit” the market maker’s bid of $970. In effect, the bid is the price at which the market maker is willing to buy the bonds and the asset manager sells. The total trade value will be $970 x 10,000 = $9,700,000.

The market maker now owns the bonds. This is called being long. An important part of being a fixed income trader is managing their risk by selling the bonds in the market before they change in price. The market maker wants to find a buyer for the bonds willing to pay the offer price of $990. If successful, the market maker will spread $20 per bond, or $200,000.

You can read more about market making in IMF’s Global Markets journey.
Here are our top five reasons to choose a career in fixed income trading.

Reason 1 – A wide variety of desks to work on

Fixed income desks are part of FICC – Fixed Income, Currencies, and Commodities and include a wide range of different desks, more than stock trading. These include corporate bonds, government bonds, credit-linked derivatives, money markets, mortgage-backed securities, and more. With all these different trading desks, career paths within the FICC are wide open. You have the ability to find an office that matches your strengths and attributes.

Reason 2 – Lots of roles working alongside fixed income trading

You may prefer working alongside traders rather than working in the pressured role that is trading. Fixed income securities offer many opportunities to do this. Fixed income sales are suitable for outgoing and social people who enjoy developing client relationships and discussing financial markets with clients. Sales people need to have the pulse of what’s happening in the market and the technical ability to be the link between clients and other internal roles within an investment bank.

Many investment banks view structuring as a separate team within fixed income, given the complexity of some products. The structures have strong quantitative skills, creating personalized solutions for clients with specific and complex needs.
Strategy is a separate office in certain Global Markets divisions. Working on this team means you will develop investment recommendations for fixed income securities based on market fundamentals and technical research.

Reason 3 – Fixed income trading is more difficult to automate

In general, the simpler and more liquid security is, the more likely it is to be automated. In contrast, less liquid complex securities are less likely to be automated.”
The good news is that many fixed income products are complex. the bad news is that simpler areas such as investment grade corporate bonds are still being automated. In January 2021, the average daily volume of fixed income electronic trading hit a new record high of $10.6 billion, surpassing the previously set record of $10.3 billion in May 2020, according to a report from Greenwich. Associates.

Fixed income traders will not disappear. Even so, if you want to pursue a career in fixed income trading or structuring, a good tip would be to learn some computer programming skills. Sellers will have an advantage if they have knowledge of quantitative research and algorithmic trading strategies.

Reason 4 – the macro story

If you like macroeconomics with a bit of math, the rate bureau may be right up your alley. The Rates Desk handles government bonds, interest rate swaps, futures, and structured products based on rates, options, and swaps.
This requires a deep understanding and focus on macroeconomics, as interest rates and inflation expectations are the main drivers of the value and price of these products. This means understanding what is happening with global and regional economic growth, exchange rates, and governments’ monetary and fiscal policies.

Novice traders invest much of their time in research to predict changes in the interest rate curves used to price fixed income securities. The products traded by the rate office tend to be relatively more complex, so automation is unlikely in the short term. However, as with many roles within the Global Markets division of an investment bank, IT experience will be advantageous.

Reason 5 – credit history

Credit traders execute trades involving corporate bonds. Traders on this desk execute trades in bonds issued by companies such as Apple (NASDAQ:), Tesla or Exxon (NYSE:) Mobile. Desks are often split between investment grade bonds with low or low credit risk and high yield bonds with higher credit risk. Credit risk is the risk that the issuer might default and is most often measured using credit ratings such as those issued by Fitch, S&P or Moody’s.
Credit traders are the most micro-oriented traders in all of the FICC. In other words, while credit traders need to be aware of broader macroeconomic conditions, company-specific events are key to evaluating and valuing corporate bonds.

Credit traders spend much of their time analyzing companies and their credit risk alongside their credit research colleagues. They will look at many different types of credit ratios and perform stress tests on those ratios to see if companies could default if economic conditions deteriorate.

Some banks are trying to automate corporate bond trading as much as possible. While this is a consideration if you’re looking for a career as a credit trader, it happens more slowly than in the stock markets.

Ultimately…. fixed income interview tips

Candidates will receive more questions about macroeconomics than other areas of investment banking. This means having a thorough understanding of GDP, yield curves, inflation, interest rates, exchange rates. You must apply these concepts to financial markets and their impact on different products within the FICC.

You can access our fixed income glossary to familiarize yourself with key terms and jargon used in the fixed income markets and by any financial analyst.

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