Difference between Credit Trading and Rates Trading?

Hey, is there a difference between credit trading and rates trading?

I thought they are both just trading bonds?

Thanks a lot!

Rates Trading vs. Credit Trading?

At a broad level, rates trading has a macro-economic focus looking at economies and interest rates. Credit trading has a micro-economic focus and looks at specific debt securities such as corporate bonds.

What is Rates Trading?

Interest Rates Trading revolves around more macro credit products such as government bonds and interest rate swap products. Threse roles will be heavily focused on the yield curve, inflation in different geographies, and monetary policy.

What is an Interest Rate Swap?

An interest rate swap is an agreement between two parties to exchange interest payments to create a marginally lower interest rate payment on both sides. This usually involves exchanging fixed vs. floating interest rates.

What is Credit Trading?

As previously mentioned, Credit Trading is more based on micro analysis such corporate bonds and credit default swaps.

What is a Credit Default Swap?

A credit default swap transfers the credit exposure of a fixed income product between parties. The buyer of the swap makes payments to the seller. This acts like an insurance in the event of a negative credit event - such as default - at which point the seller will pay the buyer a premium.

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Comments (27)

Nov 28, 2010 - 9:08am
tdr34, what's your opinion? Comment below:

In short. they are not as similar as you'd think. Credit is micro focus while rates is macro. Both fields also have derivatives products that aren't bonds (ie Swaps).

Jack: They’re all former investment bankers who were laid off from that economic crisis that Nancy Pelosi caused. They have zero real world skills, but God they work hard.
-30 Rock

Nov 28, 2010 - 11:59am
Recap, what's your opinion? Comment below:

IRS? Internal Revenue Service? What do you trade there?

Nov 28, 2010 - 12:02pm
Gekko21, what's your opinion? Comment below:
Walkio:
IRS? Internal Revenue Service? What do you trade there?

Interest Rate Swaps.

You are either paying a fixed rate and or receiving a fixed rate. If you are paying a fixed rate, you are receiving LIBOR and hope that rates increase. If you are receiving fixed, you are paying LIBOR and hope that rates fall. There is a lot more to IRS, but that is the general idea.

"Greed, in all of its forms; greed for life, for money, for love, for knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA."
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Nov 28, 2010 - 2:19pm
Recap, what's your opinion? Comment below:
Gekko21:
Walkio:
IRS? Internal Revenue Service? What do you trade there?

Interest Rate Swaps.

You are either paying a fixed rate and or receiving a fixed rate. If you are paying a fixed rate, you are receiving LIBOR and hope that rates increase. If you are receiving fixed, you are paying LIBOR and hope that rates fall. There is a lot more to IRS, but that is the general idea.

Gracias. I now realise how retarded my post was.

Nov 28, 2010 - 1:27pm
tdr34, what's your opinion? Comment below:

Well, credit people would be more likely to go to a debt fund than equity, but yes, rates would be more likely go to global macro funds if they were to leave the sell-side.

Like I said, very different focus in rates vs credit.

Jack: They’re all former investment bankers who were laid off from that economic crisis that Nancy Pelosi caused. They have zero real world skills, but God they work hard.
-30 Rock

Apr 4, 2011 - 1:58am
futuretrader1999, what's your opinion? Comment below:

to anyone that works in fixed income

can u comment on choosing between corporate credit and emerging market credit

trying to decided between the 2 but am leaning toward em as i feel it has a more macro feel than corporates

IVY for Life
Apr 4, 2011 - 4:29am
derivstrading, what's your opinion? Comment below:
futuretrader1999:
to anyone that works in fixed income

can u comment on choosing between corporate credit and emerging market credit

trying to decided between the 2 but am leaning toward em as i feel it has a more macro feel than corporates

Look up BondArb's (I think it was him) post on EM trading, it was really extensive.

Apr 6, 2011 - 10:34am
SalGr, what's your opinion? Comment below:
futuretrader1999:
to anyone that works in fixed income

can u comment on choosing between corporate credit and emerging market credit

trying to decided between the 2 but am leaning toward em as i feel it has a more macro feel than corporates

If you like to monitor company news and performance,choose equity.If you prefer to monitor economic news (i.e. unemployment,growth) and mostly interest rates,choose EM.

Apr 6, 2011 - 10:35am
barc09, what's your opinion? Comment below:

Rates trading (Originally Posted: 05/28/2010)

Rates trading

  • Apologies about being basic but just learning about this stuff but can some explain:

1) What are various subgroups within rates each trader will be separated into trading and which gets what skill sets?

2) Can some explain to me what the actual job is like day to day? Walk me through what the role actually is?

3) Common interview questions

Thanks!

Apr 6, 2011 - 10:37am
samiam1234, what's your opinion? Comment below:

Q's have already been discussed by a few traders on here. search a little and you'll find it.

Apr 5, 2011 - 12:23am
futuretrader1999, what's your opinion? Comment below:

thanks for this, i checked that out but in terms of strengths and interests, can anyone define say what one needs to be good at on a corporate bond sales desk versus em credit sales (also then em credit at JEF, where fx is not even offered)

don't know if this is true, but i had heard that many of the corporate bond sales positions have been eliminated in the past 15 years

IVY for Life
Apr 6, 2011 - 10:39am
ohyeah251, what's your opinion? Comment below:

Query on Credit and rates trading (Originally Posted: 12/22/2006)

Can someone

1) guide me to some good resources on Credit and rates trading

2) throw light on the business prospects of Credit and rates trading (whether it is a hot thing in the market/sought after etc)

Thanks

Apr 6, 2011 - 10:40am
Jimbo, what's your opinion? Comment below:

rates is a mature market, other than the structured stuff. credit trading is the 'hotter' market, but the two are quite different. i've worked in both

Apr 6, 2011 - 10:41am
Boy Plunger, what's your opinion? Comment below:

re: going into credit trading, would you advise against going into this sort of role given the current environment? Or do you think there'll be a pickup in activity (and bonuses?) once all this mess gets cleaned up (12-18mths?)

Apr 5, 2011 - 12:28am
heister, what's your opinion? Comment below:

What are you looking at in the EM? Are you looking at a liquidity desk or a capial rasing type gig? 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.

Follow the shit your fellow monkeys say @shitWSOsays

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Apr 6, 2011 - 10:42am
MBAinSearch, what's your opinion? Comment below:

Rates trading position at hedge fund - question (Originally Posted: 07/13/2011)

Yet another interview for trading position. This time it is for a trading position in rates with a hedge fund. From what I understand, the role will ultimately lead to a position in portfolio management.

I appreciate that at HF you buy and sell for PM and don't have your own P&L, unlike for a market-maker at I-bank. However, how is such position regarded compared to a trading position at the I-bank in terms of skills you develop, money-making potential, and ultimately entering the investment management role?

Also, what sort of questions should I expect?

Any advice would be highly appreciated.

Best

Stay curious

  • 1
Apr 6, 2011 - 10:43am
Reality, what's your opinion? Comment below:

I would say it strongly depends on the precedent in the fund, on your background. What is your prior experience/education?

My background: Tier1 Macro fund (Soros, Tudor, Moore, etc)

Apr 6, 2011 - 10:44am
MBAinSearch, what's your opinion? Comment below:
Reality:
I would say it strongly depends on the precedent in the fund, on your background. What is your prior experience/education?

My background: Tier1 Macro fund (Soros, Tudor, Moore, etc)

Hi, Education: finance/business management undergrad, MBA from top 6 (quantitatively oriented) b-school in the US. Background: worked at BB but not in trading for couple of years; it was a front office role in S&T but with an emphasis on execution => which is why I hated it and I am now looking to switch to a more "cerebral" function.

Stay curious

  • 1
Best Response
Apr 6, 2011 - 10:45am
Reality, what's your opinion? Comment below:

I can't comment on interview questions specifically, as rates is not my area, however in terms of your other questions, my views are as follows (I know there are some rates traders here who can comment further):

1 - At a junior level, the compensation on the buyside is typically lower - some may disagree, but i've worked in two tier 1 ($15-30bn) hedge funds, and this is always the case, unless you're incredibly lucky or they're incredibly generous.

2 - You may be lucky enough to have a book on the execution desk, where you can punt ideas, or you may also simply find that your job is passing an order from one guy (PM) to the next (Sellside sales).

3 - In practice, going from being a senior, risk-taking, sellside trader to a hedge fund PM is far more common than going from execution to PM.

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. If you can get into a strong IB which has a decent book, that is undoubtedly the lower risk option.

Apr 6, 2011 - 10:46am
MBAinSearch, what's your opinion? Comment below:

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Stay curious

Apr 6, 2011 - 10:47am
Reality, what's your opinion? Comment below:

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