What Do You Do In Fixed Income Besides Bankrupting Your Firm with Toxic Assets?

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fixed_incomeIf you’re reading this, you probably don’t know too much about what you actually do in investment banking and sales & trading beyond a lot of work, Excel, and models and bottles.

Why else would the articles on Mergers & Acquisitions, Restructuring, and UBS LA be among the most popular ones here?

We’re going to fix that today by teaching you all about Trading, what Traders actually do besides gambling and eating a lot of junk food, and specifically what you do in Fixed Income.

This was written by Jerry since he actually worked in trading before, so direct all questions/comments to him.

Types of Trading

“Trading” is a nebulous term, so let’s fix that by discussing the two basic types first: agency trading and prop (proprietary) trading.

There are far more than 2 types of trading, and there’s always overlap between these, but these are the basic categories.

Agency Trading: You simply execute orders for the client – you’re merely an “agent” doing what he/she wants and do not have (much) freedom.

Prop Trading: You are the principal and can make whatever trades you want, using your own money – within your trading mandate and risk limits.

These are the 2 extremes – no choice, and 100% choice. In between is a generic area termed flow trading where there’s some element of agency trading but also some prop trading involved.

Example: in flow trading if the client wants to buy a stock, you can be the seller – and if he wants to sell, you can be the buyer, so you’re effectively acting as the principal there.

Flow traders can also choose to reject orders and generally have more freedom than pure agency traders.

Note: There is a lot of discrepancy and overlap between all these different types of trading, and each firm is set up somewhat differently. These are just the basics.

Equities vs. Fixed Income vs. Everything Else

Flow trading and agency trading refer to whether or not you have clients. The other main category is what you trade – individual companies’ stocks? Bonds? Currencies? Derivatives of those?

There are lots of different groups within Sales & Trading at a bank, but today we’re going to focus on Fixed Income – anything that involves debt.

“Fixed” Income?

Originally, Fixed Income meant that whatever you traded had a “fixed” income stream – think bonds, loans, or anything else based on bonds or loans (derivatives). If it paid a certain interest rate and was redeemed at the end of a specified period, it was fixed income.

But once clever bankers started creating collateralized debt obligations (CDOs) and other fancy instruments that no one really understood, the term “Fixed Income” lost its meaning – all of those were placed into this category, even though nothing about them was “fixed” other than the potential to destroy the economy.

Prices of these securities are affected mostly by interest rates set by the Fed and by the credit quality of the corporate and government issuers.

FX and commodities traders work closely with those in Fixed Income and they are often classified in the same group, even though nothing about exchange rates or commodity prices is “fixed.”

Types of Fixed Income Trading

Groups are usually divided by the types of instruments you trade – whether they’re relatively “safe” government bonds, more risky corporate bonds, or even more exotic securities. Of course, occasionally traders will venture a bit out of their own turf to trade other instruments if it is allowed at their firm.

Government Bonds

This includes US government debt (notes, bills, and bonds, known as US Treasuries), Euro-denominated German debt, and yen-denominated Japanese government bonds. There are also others like inflation-protected bonds, repurchase agreements, and bond futures.

Usually you only trade the government debt of one country, and if your team is big enough you might specialize in a certain area like 5-10 year bonds.

Although government bonds are “safer” than other fixed income securities, the job itself can be stressful because these markets are constantly trading – even in off-market hours. And that means that you need to follow these markets, even when you’re out of the office.

Since there’s so much liquidity, you can take huge positions without too much trouble (unlike, say, buying 20% of a company’s stock where you would have to disclose it). Traders who bet on the US lowering interest rates in 2008 made small fortunes by betting big.

The Work Itself

You spend most of your time as a junior trader predicting changes in the shape of the risk-free interest rate curve, because that is the #1 factor that impacts government bond prices.

There’s not too much valuation work; usually you just do simple DCF calculations in Excel or on Bloomberg to get prices – it’s not like investment banking or private equity where you use many different methodologies to value companies. Your main concern is DV01, or how much you make or lose for every 1 basis point move in interest rates.

If you like macroeconomics rather than analyzing individual companies, government bond trading may be good for you.

Corporate Bonds and Credit Default Swaps

Corporate bonds are just like government bonds, except companies issue them so there’s always the chance of default – and the yield is higher to compensate for that.

If you’re working with smaller or non-US/European companies, you need to watch the news constantly to stay on top of things – but compared to government bond trading there’s less emphasis on macroeconomic happenings.

Credit Default Swaps (CDS), meanwhile, are like insurance on bonds: they’re derivatives that let you separate the risk of default from the risk of interest rates falling, so you can effectively “insure” yourself against losing your investment.

Most banks combine these two groups, since the value of corporate bonds and credit default swaps are closely related.

The Work Itself

You spend most of your time analyzing the credit profiles of different entities and weighing the bond yield against the risk of default – so you follow both company-specific and macroeconomic news.

You analyze credit profiles by looking at the financial statements of a company, the sector as a whole, and companies’ credit ratings.

Some say the work is more “interesting” than government bond trading because you’re working with different companies and because there are more trade possibilities – buying one company’s stock while shorting competitors’, for example.

These days it would be tough to get a job in this division due to the financial crisis and the sheer number of credit teams that have been laid off.

CDS may become more “standardized” on an exchange, which might improve liquidity and transparency – so opportunities there may return in a few years.

Structured Credit Trading

Of the different Fixed Income groups here, Structured Credit Trading is the most different because they don’t spend all their time checking the market and keeping up to date on the news.

Instead, they price and package complex financial products in Excel and then sell them to investors.

They don’t make trades every day, but when a trade does happen it could be for an amount of hundreds of millions or billions of dollars – compared to the other two groups above, where the size of individual trades is typically much smaller.

Although Structured Credit Trading is the most “quantitative” of entry-level Fixed Income jobs, you don’t need a Math Ph.D. or anything because you don’t actually create the tools used to price complex securities – that’s for the Ph.D.-level quants. You just need to understand the tools and how to use them to create your own products.

You don’t spend much time looking at individual companies, since most of these “financial products” involve hundreds of companies.

The Work Itself

See above. You spend a lot of time in big Excel spreadsheets figuring out how to price different securities. This is more quantitative than what you do in investment banking or private equity – in those fields, you mostly just do addition and subtraction, and sometimes multiplication or division if it’s super-advanced.

Right now it would be very difficult to actually get into Structured Credit Trading because of the financial crisis – most groups have been hit hard, just like everything else related to credit.

However, in the long-term there will still be possibilities here, so it’s something to consider if you’re still a few years away from looking for internships or jobs.

Exit Opportunities

So now you might be wondering, “Ok, so it sounds like a lot of this is repetitive and like you do a lot of grunt work as a junior trader – surely, the exit opportunities must be better, right?”

If you go into investment banking, you could go into a wide range of different fields afterward – private equity, hedge funds, venture capital, corporate development, or something completely different.

In trading, though, you only have 2 options: stay in trading (a similar “up or out” structure exists as in banking), or move to a hedge fund or prop trading firm.

That’s because the skill set you develop is so specialized – valuing companies and performing due diligence is useful in a lot of different fields, but knowing how to trade CDOs would be completely useless at a startup or venture capital firm.

Typically, as you advance you become even more specialized – so if you start out trading corporate bonds for European telecom companies, chances are you will go to a hedge fund that also trades corporate bonds for European telecom companies. You get pigeonholed very quickly as you move to the buy-side, which is one reason I chose to leave and start my own firm instead.

That’s not to say that you can’t move into other fields in finance if you start out in trading – but it is very rare to see a full-time trader move into, say, private equity or consulting following several years on the trading desk.

Up Next

Equity Trading, Day(s) in the Life of a Trader, and more…

About the Author

graduated from Stanford, worked in equity research and trading in Japan, and then started and sold his own prop trading firm in China. He then attended both Yonsei University in Korea and The Lauder Institute at Wharton, graduating with an MBA. He currently works as a Financial Analyst at Google in Tokyo, Japan. You can read an interview with him here.

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202 Comments to “What Do You Do In Fixed Income Besides Bankrupting Your Firm with Toxic Assets?”

Comments

  1. JW says

    Dear M&I,

    I have a question regarding Structurers in the trading floor. How does that work? Is it the same pay structure and hours as traders and sales ? Is this market big in HK?

      • JW says

        Thanks. Just wondering for recruiting in HK or northern hemisphere in general, when will full time offers generally be given out? Is it in February or sooner. I ask this question as they ask us to hand in our complete application by early to mid October and yet I heard that offers don’t go out till Feb.

        • JW says

          Just out of curiosity? What percentage investment banks in Wallstreet, London and HK are actually traders as compared to bankers?

          There must be more traders as they generate more than half the total firm revenue? IB usually is comparable to investment management at 25% each

          • says

            Actually not sure about that. You’re right that trading generates the majority of revenue but that doesn’t necessarily mean there are more traders – the profit per trader is just higher in a lot of cases. Overall I think there are actually fewer summer/full-time openings in trading because traders don’t quite follow the 2-years-and-out track you see in IB.

  2. Dre60 says

    Is working for a Mortgage Brokerage/Mortgage Bank relevant experience for getting into Mortgage Loan Sales & Trading, Mortgage Servicing Rights Sales & Trading, Mortgage Backed Securities Sales & Trading?

  3. Andrej says

    Dear M&I,
    can you please advise me how much salary should I ask on interview in boutique for position of Junior Fixed Income Sales. I’m a recent grad with some experience in IB. I belive I made a nice impression on HR, but I said that all i want is 1600$ gross, what do you think?

      • Andrej says

        Oh man! Things happening in Russia. I said that I wanted 1600 USD per month. But after some time I understood that it is Investment Banking and I should asked more, so after another interview with head of sales, I told him that i want more then 1600$ per month. So they invited me to another interview with head of HR to talk just about salary, I guess they really want me on that position but I have no idea what to ask now. I’m thinking of 3000 $ gross per month should I ask more.. any thoughts?
        I’m really inexperienced in questions of salary. Don’t they have a fixed tariffs or something?

        • says

          Really don’t know what pay is like in Russia so I can’t comment, ask for the standard offered to people in London

  4. lizzy says

    How do u trade off the Toxic assets of the banks and what are the guiding steps as regards The Asset Management Company that takes such non performing assets?

  5. Dre60 says

    Some commodities schedulers/planners that work in engineering firms also work in some commodities sales & trading groups in banks. How is being Scheduler/Planner relevant to Finance/IBanking (Sales & Trading)?

  6. Josh says

    Not sure about the US and Europe, but in Australia we have both corporate and government run funds called “Super-Funds” (superannuation funds), much like a pension fund. Do you have any insights as far as trading goes at places like these? I assume they would be similar in composition to Hedge Funds, but with much “safer” trades as you’re in charge of peoples retirements?

    • says

      No idea there, maybe someone from Australia can help out. I would assume it’s closer to long-only asset management (do a search on the site)

    • M&I - Nicole says

      We’ve responded to your question on this post – Sales & Trading vs. Investment Banking, Part 2: Lifestyle, Co-Workers, Pay & Exit Opportunities – already. Pls don’t leave the same question on different posts.

  7. Max says

    Hey Brian,

    I have an interview lined up in Germany with a large,prestigous BB in Frankfurt for a fixed income sales internhsip (third semester bachelor student).
    It’s certainly interesting and valuable, however I am also interested in the classic IB Division.
    As this is not yet an option after this semester, I wonder whether the sales internship will be of any use for landing other internships in IB (and possibly consulting)? Or would you rather wait for the possiblity of doing your first internship in the desired department?

    Greetings from Germany

    • M&I - Nicole says

      Yes – the network you develop. You can also spin your sales skill you acquired in your IB interview. However w concrete product knowledge that would be hard to transfer
      I’d just do the internship now – who knows you might love it

  8. says

    SO I get the trading part of S&T….what about the sales part? I know that on the bond desk they have sale guys also who sell inventory to Financial advisors.

    • M&I - Nicole says

      Sales – you are selling a product to institutional investors like hedge funds and long funds; your firm earns a brokerage fee / commission

  9. says

    sorry that earlier comment should be deleted.
    SO I get the trading part of S&T….what about the sales part? I know that on the bond desk they have sale guys also who sell inventory to Financial advisors. My question is how do you get to those positions?

  10. Dre60 says

    I have an interview for a Quant/Financial Engineer/Structured Credit role.
    The job function is doing analysis and then traders will use that analysis to execute trades on CDSs, Subordinated ABS Bonds, and Whole loan packages.

    So what factors do traders consider when trading Credit Default Swaps? (i.e. Credit Spreads, Bid/Ask spreads, CDX indices, Value-at-Risk, Duration, Convexity, Yield Curve, Volatility, etc.)?

    As far as Structured Credit Trading. How do you price and package these complex financial products in Excel?
    I know it involves developing Waterfall Models.

  11. BigB says

    Dear M&I,
    How does one with structured finance experience from Big 4 break into sales and trading or I banking. It was quite easy in 2005/2006. Impossible now. Working on part time MBA concurrently. Is it better to go via full time campus recruiting or network directly. The question is does my current structured finance modeling experience count for anything or should I consider myself Associate entry level applicant?

    • says

      See the links above on structured finance. I would actually suggest going into something like a SF-focused hedge fund rather than S&T. Getting into S&T with substantial experience elsewhere is tough.

  12. says

    Hi,
    Were creating our own class of ABS, am JV’ng with a hedge fund to do so want to get an idea of the compensation accompanies with originating ABS’s?

      • says

        We’re creating a new Asset Backed Security. To structure the product we’re going to Joint Venture with a hedge fund, independent investment bankers who have relationships with the larger banks to provide liquidity and credit enhancement services to the Special Purpose Vehicle. Our role is creating the security, opening up the market for the securities, etc. My question is from the creation and trading of the securities how much would a company make/be compensated for the trade. I know much is based on whether they are Prop trading and the valuation of the security.

  13. ask says

    I have an experience of 6 years in commercial banking, i was a credit analyst and now an associate ( same as a Relationship manager) for large corporate banking customers. I am also a CFA charter-holder. and now having an offer as a senior trader in the Treasury group in another bank,

    What do u think of that move ?!

    • M&I - Nicole says

      If you want to move, like the team, I’d move unless you have better options or prefer staying at the same firm

      • ask says

        i didn’t get what you mean ?! I am asking for your advice , dose it really worth shifting my career and begin from the scratch in the treasury department ?

        if u were in my shoes and given my current experience, how do u truly evaluate the move from corporate banking relationship manger to a fixed income trader and may be a structurer ?

        Thanks

        • M&I - Nicole says

          Honestly, it is hard for me to comment your move on this page because I don’t know you in person and I only have limited info to work w. Your first few questions sounded confrontational to me.

          If I were in your shoes, I’d figure out
          1. what I want to do in the future
          2. whether the move to FI trader/structurer wld fit into that picture

          Other than the above, I think readers can offer you better suggestions.

  14. Dre60 says

    Great article! However, this article didn’t cover the Money Market Desk, Loan (Bank loans, Syndicated loans, Middle Market loans) Desk, Municipal Desk, Investment Grade/High Yield debt desk.

  15. the ninja says

    Hi,
    I am going to do an interview with fixed income sales team, I am wondering the kind of questions sales team wil focus on? Will there any be brainteasers? Thanks.

  16. Bemi says

    Hi,
    I’ve got an interview coming up for a junior business management role within fixed income at a European IB. Please can you share any tips on how to rock the interview? A bit of background info: I did an internship at this bank within IBD a few years ago but i didn’t get a return offer. Things didn’t end up well so am quite surprised they want to interview me..I am currently interning within fixed income trading at another bank. I would really appreciate advice on how to prepare and how to go about tackling inevitable questions about the IBD experience.. Thank you..sorry for the long message

  17. Bin says

    Hi,
    I ‘m considering a internship on fixed income sales.
    Could you please shed some lights on what would I do if I got this potision?

  18. Jersey says

    Dear M&I:
    Thanks for your summary. i have been interested in trading jobs for a long time, but i still didn’t figure out what is the difference and relationship between traders and quants, especially when arithmetic trading becomes more and more popular?

  19. John Anderson says

    Dear M&I,
    I recently landed a new job on the fixed income side on the corporate actions desk, after 3 years on the equity side in back office/trading. I do not have any experience or knowledge about this side of the business. Do you have any advice for learning how fixed income works, as well as corporate actions in FI? Maybe a good book to read, thanks

      • Kaysonne Anderson says

        I’m looking for a book that can give me a concise yet thorough understanding of fixed income, including pricing, benchmarks, spreads, speeds. I am interested in all types of fixed income as well. I am definitely looking at a beginner’s guide/introduction to everything.

        I saw that everyone referenced Fabozzi, but I saw that the book is listed as 1500 pages. Several posts mentioned that it was a huge conglomeration of various essays and information, not all written by him, and often poorly organized. I’ve seen references to Tuckman and now Tamara Henderson’s book.

        With that being said, is Fabozzi’s book still the best option for a beginner, or should I start with Tuckman or Henderson (or even another book) and then move on to Fabozzi after I get the basics down?

  20. Hbk says

    If I start my career as a trader at a bulge bracket investment bank, what other career options can i pursue after a few yrs, besides continuing as an investment bank trader ?

    Thanks!

      • hbk says

        By “buy side”, are you referring to Hedge Funds or Prop Trading firms or Asset Management Firms ?

        Thanks Nicole !

          • hbk says

            Thanks Brian,

            I have 2 follow-up Qs:-

            1. If i start as a trader at an investment bank, I will not be making decisions on where to invest, rather I will be market making for clients. Whereas as a hedge fund trader, I will be required to make the investment decisions myself. Given this gap, is the transition possible & is it relatively common? If so, how do people overcome this skill-set gap ?

            2. What products are currently traded by human traders at investment banks today (instead of algorithmically) ?

            Thank You!

          • says

            1. Not entirely true. Some banks do still do a good amount of prop trading, even though it’s “disguised” these days.

            Lots of traders move to HFs, so it’s fairly common.

            2. Honestly not sure on the specifics there, but we hope to feature more on specific trading desks and products in the future.

  21. WantToBeATrader says

    I’m starting college this fall and will be attending a top-20 target for trading. My goal is to become a trader at an investment bank on a fairly quantitative desk. Which trading desks tend to be the most quantitative? What products do they specialize in?

    Also, where should I be looking for summer positions in freshman and sophomore year? It seems that summer trading internship at investment banks are restricted to college juniors. What firms could I possibly work with before my junior year?

    • says

      Most quantitative: Exotics, followed by (some) Fixed Income desks.

      Look for rotational internships at large banks – before that, think about related areas like PWM / AM or small prop trading firms to get started.

      • WantToBeATrader says

        This article describes three different fixed-income trading desks. Which one of those would be the most quantitative?

        In addition, I’d like to know if there’s a consolidated list of the top prop trading firms. I’ve seen multiple lists of the bulge-bracket banks, but I’ve never seen a list of similarly prestigious prop firms.

        • says

          According to the author, Structured Trading is the most quantitative:

          “Although Structured Credit Trading is the most “quantitative” of entry-level Fixed Income jobs…”

          I don’t know of any lists of prop trading firms because they are very secretive and also quite small, but if you have Capital IQ access you may be able to look up information.

  22. King Kong says

    Hi Nicole,

    I am preparing for a Fixed Income sales and trading 2nd round and am wondering what should I focus on? SHould I know all the types of securities and financial modelling?
    Moreover, do you have some example of fixed income securities pitch? How is the interview different from the equity interview in which you are expected to pitch a stock?

    Thanks so much

    • M&I - Nicole says

      Knowing fundamentals of fixed income and how to price bonds would help. You don’t need to know all types of securities but having basic knowledge would help, and its best if you could demonstrate your quantitative skills and preference for fixed income over equities.

      No I don’t have an example of a FI securities pitch. I think the interview would be more quantitative, they might also ask you basics on fixed income and why you think about the FI market.

      • King Kong says

        Do you where I can access some free sample of fixed income research? I see several equity research online but haven’t seen anything for fixed income.

        Moreover, when you say basics: you mean like the price, present value, yield curve, interest rate?

        How do I prove iam quantitative to them and how much in each FI types should I know?

        I am sorry for asking too many questions but this might be my final chance for FT so I really want to do well.

        Thanks

  23. J-boy says

    Hey,
    I have always known that I want to work in investment banking. But recently I have realised that I may be better suited to specifically, the sales division. So I just thought I’d ask, are the sales people at an investment bank, the type of people that are the centre of attention at a gathering, and always talking perfectly and almost lyrically? Or is this a myth, are sales people in investment banks more reserved and intellegent?
    Cheers for any advice

    • M&I - Nicole says

      Yes there are institutional salesmen in banks. They do talk eloquently, though each has a different style; some maybe more reserved and intelligent, while others maybe more gregarious. We don’t have an article on institutional equity sales yet, but this article on CB sales may be useful to you: http://www.mergersandinquisitions.com/institutional-sales-convertible-bonds/ The interviewee is a more reserved type of person; his style is slightly different from that of others

      • J-boy says

        Thankyou very much, also wondering, is a psychology degree from a top teir uk university too soft for getting into sales at a bulge bracket in london. Think ucl/lse for gs/ms

        • M&I - Nicole says

          I think UCL/LSE are both good schools and can potentially open you doors to GS/MS. However, you’ll still need strong grades and credentials to get interviewed, and strong set of interviewing skills and pitch to land the role!

  24. SP says

    Great article.

    I’m doing some investigation into the measures of performance used to pay traders in a fixed income department of a BB IB, and also the measures the board uses to pay the manager of the department.

    I was hoping you could provide me with some insight!

    Thanks!

  25. mike says

    At the Structured Credit Trading desk, what are the roles(e.g, Trader, Sales, Structurer)? Specifically, given the length of time it takes for each trade, which is inconceivable at traditional trading desk, how is a structured credit trader’s work different from that at other traditional desks?

  26. Cliff says

    Hi
    First, thanks for all the help and advice, helped me move from it to s&t structured credit. The work is really interesting, quantitative and some thing new has to be done in literally every trade(deal).

    The only bit I don’t like about it is the commonly stated lack of exit ops. Is it really that difficult to move around? How often do people burnout and move to something completely different?

    Also how does s&t compare with the other choices in terms of b school applications?

    • says

      Thanks! I think you can move around, but it’s not easy compared to exit opps from, say, IB roles. Most likely you would go to a HF or maybe the structured finance team if there’s some overlap with the work you do.

      Top business schools are definitely do-able coming from S&T, but you see fewer traders represented because business school doesn’t necessarily help as much in trading.

      • cliff says

        Thanks a lot Brian. I doubt you have an estimate of how many people you’ve helped who don’t actively post on this site.

        Long time reader, 3rd comment.

  27. ryan says

    I am just wondering which product group within GS/MS/JPM NYC rates trading would you recommend to join as? I believe there is MBS, treasuries, swaps, and agency bonds. Thanks a lot for your input.

  28. King Kong says

    Hi,

    What are your thoughts of joining a Repo Trading desk versus a Structured Credit Trading desk? Do you think Structured Products as a whole will grow? Repo does funding for all the desk so it is a very important desk and will keep growing when the firm grows right?
    Thank you so much.

    And what would the roles of a junior trader on a repo desk be?

  29. Banbanmoomani says

    Hello M&I

    I would like to know your opinion on what are the practical exit opportunities from high yield and distressed credit analyst role. I am assuming credit hedge funds, special situation, etc. but can this even lead to PE? What about into IBD in lev fin / dcm? Thank you for your input!

  30. Jackie says

    Hi Brian,

    I have an interview coming up with a company’s Fixed Income Sales & Trading group. What kind of topics do you think I should prepare for? I know mostly bonds, but should I prepare a stock pitch as well?

  31. says

    A really interesting and educational post Jerry. I think technology and finance are fast merging. The “silicon trader “ is arguably taking over “human being” trader. How do you think this will effect the process? Will it make so much difference? I guess the priorities remain the same at some level. The work definitely remains interesting and challenging.

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