How do you come up with trading ideas for FICC more specifically for corporate debt or rates? Explain like I'm 5 please

BOBBERT's picture
Rank: Senior Monkey | 96

I have never come up with any trade ideas outside of equities, so I don't actually understand how it works really. I know what FI products are and the basics of FI but what does a FI trading idea entail within the realm of S&T? If someone could help me on this seemingly dumb question I would really appreciate it. What exactly is expected of me when I pitch to a client/ what kind of things are pitched?

Do I have to do fundamental analysis or something? How do we make money for the bank if we can't prop trade, but have to have the opposite position our clients want? its so confusing...

Like say Client X wants to buy 10 million 30-yr bonds from our bank, we would then be short 10-million of these bonds... how do I make money from this trade, if I think the bonds are going to go up in value?/how would I even know they are going to go up in value? DO banks always have to accept a trade in such a case?

ANY insight on these questions would be much appreciated. Thanks
Please forgive me for any ignorance. I just want to learn.

Comments (11)

Most Helpful
Jan 10, 2019

credit: is an extension of equities (think about different layers in the capital structure) if equities rally in price, so will credit most likely. they are both "risk" assets driven by the same company-specific risks

rates: rates are a barometer for how a nation's economy is doing in terms of inflation, growth, employment and central bank monetary policy. when economies are strong, prices in the are rising (inflation), unemployment is low and the the population is productive (gdp is high). in this sort of environment, we would likely see higher rates than in a period of depressed growth and deflation.

fx: is a sibling of the rate market, but here we are taking a relative-value position of one economy in versus another. if we buy EUR we are inherently selling USD. therefore, we think the eurozone will outperform the US in some way for our trade to make money.

Jan 10, 2019

and to answer your question about "how banks make money": no banks dont need to accept every order they get and they charge bid-offer spreads to compensate for doing the trade.

Feb 8, 2019

Okay and how is the bid-offer spread determined in an OTC market?

Jan 10, 2019

there are different kinds of trades in Fixed Income

a few examples are:
relative value of the curve (long 5yr- short 10yr- long 30yr fly)
outright direction (long 10yr yield) (maybe vs S&P futures, or USD/JPY)
curve (long 10yr - short 30yr)

and then all those things in other asset classes
you look for correlations between various structures....and when you find a structure that historically was correlated, but then the correlation breaks seek out "why" and if you find a convincing answer, you then seek an answer for "will the correlation return".

You then explain that whole thing to a customer and suggest a trade.
This is a type of idea generation

just google're welcome

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Jan 11, 2019

As a bond trader there are two ways you make money - PnL, and takedown. PnL is going to be profit generated from a dealer trade, so much simpler to explain. Now onto takedown - on every bond you buy, you'll mark the bond up and offer a sales credit to your salesman called the takedown. If your salesman sells a bond to a customer they earn the takedown on the bond, and simultaneously make the firm revenue off the markup. Keep in mind this is NOT the same as PnL. So as a sell side trader you dictate how much money your institutional salesmen make on each trade. Now onto idea generation. There are so many different types of positions you can take. You can take directional positions where you think rates will move overnight due to some reason and you take an outright position to reap the benefit. You can take credit based positions. Say word just hit the street that Sears Sub 4's of xx mat in xx tranche's price aren't reflecting the fact that the recovery value of net assets will pay 90 cents on the dollar over 80 cents to bond holders due to forced liquidation. You have a broker/another dealer that comes to you with a bond for the bid, you bid it, and boom you take a position. You can have customer offers, where a customer has a position and level they want to get rid of it at so you take on the position for the customer and your sales force works it. You could be bookrunner on a primary issue for a customer and you think it's cheap so you underwrite it. You could have an aged position that went sour and your people want you to get rid of it so you swap that position with one of your buddies on the street, who has room in his book for it. Just some trades I can think of off the top of my head.

    • 1
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Jan 12, 2019

there's also the classic cds/bond arb trade, where you long bond and hedge with cds.

if cds is trading cheap then you're hedging out the bond's credit risk for less than its carry.

Jan 21, 2019

Think of it like you would equities. Maybe you think rates will rise, given what the Fed is saying or you expect a selloff because of a macro event. Then what options do you have? Bonds, derivatives (swaps, options, etc.). It's the same principal as equities but just different factors.

If credit spreads widen then you could look at CDX options in favor of a tightening. Maybe you think long term rates will rise faster than short term or vice versa. Think of what factors affect the product at hand, then what factors will influence them in the near future, and finally what you can do to enact your strategy.

I'd also consider that alpha generating trade ideas differ from how a bank is going to work on this as opposed to a fund. From a bank's perspective possibly they're selling a dynamic strat or some kind of structured product if you're trying to wrap a trade idea. Other posts cover some trading ideas one could offer.

Apr 23, 2019