AlexLielacher

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You secured a job on a bond desk but you aren’t 100% sure what awaits you? In this post I will share the key aspects of working on such desk.

For the sake of simplicity I will talk about working on a bond desk specifically as opposed to fixed income in general as that includes interest rate swaps and other derivatives.

The main types of bonds

There is a vast range of different bonds out there – the main ones being high yield corporate bonds, investment grade corporate bonds, covered bonds, SSAs, convertible bonds, financials, municipalities, asset-backed and government bonds. At the largest banks these different bonds are traded by different trading desks, meanwhile at medium-sized banks there is usually one or two trader for each segment. At smaller institutions a single trader might be responsible for trading all of the above.

A bond’s lifecycle

Let’s say a 10-year corporate bond of BMW with a coupon of 1.5% has just recently been issued, AKA an origination. Sales people then market this new bond to institutional investors, such as mutual funds, hedge funds, pension funds, central banks, etc. who will then place their orders on it. These will be put into the order book and the syndicates involved in the deal will then allocate the bonds to each and every investor.

Once the allocation and pricing of the bond is complete, it is then ‘free to trade’ and investors can then buy and sell the bonds in the secondary market. If it is a very popular issue and is highly subscribed, then the price of the bind will likely jump once it starts trading in the secondary market. Liquidity in corporate bonds is usually highest right after new issue up until about two to three days after that. Then liquidity tends to ‘dry up’, in traders’ jargon.

This is a basic example of the lifecycle of a corporate bond. Government bonds are issued at auctions; which process is different from country to country.

The Participants

Trading

The traders are those who trade bonds in the secondary market. As a trader you price client inquiries, manage risk and aim to generate profit for the bank by buying the bonds low and selling them high. The job of a bond trader became increasingly difficult over the last few years (I witnessed this first hand when I was trading high yield at RBS) as liquidity substantially dried up in the secondary market in the years following the 2008 financial crisis. A consequence of banks having to reduce the size of their trading books to reduce balance sheet.

Now, as a bond trader, you are no longer expected to make a two-way market for a good client. If you have no bonds no one expects you to short them and cover your short elsewhere in the market as many bonds has become much less liquid over the past few years.

Sales

As a bond sales person you tend to cover a few specific clients such as hedge funds, ‘real money’ (mutual funds) and private banks. Alternatively, you may cover a geographic region such as Germany, France, or the Benelux states for example. Your role as a sales person is to be the bridge between the clients and the traders. You want to make sure your clients are serviced well by the bank as well as its traders (i.e. got good pricing), but never at the cost of the trader losing money. You also go on a lot of client meetings, trips and occasional conferences like at the ICMA (International Capital Markets Association).

Research

Credit research involves analyzing different ‘credits’ (issuers) to help the traders make better trading decisions, if you are an analyst on the desk. Or, if you are a publishing analyst, you recommend trade ideas and advise clients on different credits and sectors.

If you are, let’s say, an analyst in fixed income, you tend to look more at what governments around the world are doing and what the macro-economic implications of it are on the government bond and the interest-rate swap market.

Syndicate/Origination

While origination is actually part of IBD and syndication is part of Global Markets, at many smaller banks origination and syndicate sit together and the roles are merged.

The DCM/origination and syndicate are the ones who visit corporate, bank and government treasuries and advise them what types of debt they should issue that is best for them and matches client demand. They are the ones bringing in deals.

Trading/Sales Assistants

As a trader or sales assistant, as the name suggests, you assist your colleagues by doing primarily the tasks that they don’t want to do. At large banks trading and sales assistant roles are still around, whereas at most medium-sized and smaller banks these tasks are generally done by the most junior member of the team, i.e. the graduate trainee.

As a trading assistant you collect each traders P&L at the end of the day and report it to product control (these are the guys who check that P&L is correct and marked-to-market). You also handle settlement and trade queries. In addition, you monitor the trading systems to ensure everything runs smoothly. Also, you bring traders a lot of lunches and coffees. Upside of being a trading assistant is that you are likely to end up trading within 2-3 years and you are going to get paid quite well.

Sales assistants input new issue orders into the order book; send trade confirmations (Bloomberg VCONs) to clients, and handle settlement and trade issues. Occasionally cover for sales people when they are at “client meetings” in the pub on a Friday afternoon. Similarly to assistants in trading, sales assistants get paid quite well and often end up in full time sales roles within a few years.

Developments of the bond market and the job landscape

Secondary market liquidity has become so thin in recent years that the bond market now tends to evolve around the primary market. Bond desks that do well are those that churn out a lot of new issues. This means that banks need fewer traders.

Furthermore, electronic trading has replaced voice trading for smaller ticket sizes and more commonly also for larger tickets as well, which means sales forces have been cut too. E-trading platforms such as MarketAxess, which lets everyone to trade with everyone electronically, are fast becoming the norm, which makes it extremely difficult to make money as a market maker (as you are competing with sometimes as many as 30 dealers on a single trade).

E-trading came a little late to the party in fixed income as bonds (unlike currencies or equities) are a rather heterogeneous asset class. Nonetheless, computers have been taking over and different e-trading platforms are popping up out of every corner creating more competition for trading desks.

Due to the need for banks, governments and corporations to finance themselves using debt, the bond market will always be around and there will always going to be bond desks at banks. However, I believe that headcount on bond desks will continue to decline as the secondary market moves to an almost pure e-trading environment with only a few people at the banks managing the platforms and executing orders. Similar to how it is on eFX trading desks today.
 
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