If so, I would be interested in a detailed walkthrough of your day-to-day work. Specifically:
What services do you use to view bond prices?
What data do brokers give you? Daily price tables? Is there any intraday data? Or do you have to ask for quotes?
To what extent do you group bonds together by credit? Or do you always analyze the issuer fundamentals?
What other groupings do people make? For instance, do you have a plug-and-play model for say, fixed coupon bonds, and you adjust the yield spread? Or is their deeper analysis on each issue?
Any other information?
This will be useful to me in the near future, and I imagine other people will find this interesting also. Thanks.
Someone interested in bonds. Not something you see everyday on AF.
Perspective from an FI Credit Analyst covering industrial corps
Bloomberg.
They’ll send daily quotes (runs). Intraday data is on Trace. If you have a cusip loaded up on Bloomberg TDH -Go. Also, ALLQ - Go will give you current quotes. However, the traders will go to their sales coverage to get bids when they want to sell something.
We usually look at the fundamentals first to get a sense of the issuer’s credit trend and compare with peers within the same industry, ratings category.
FI folks are big at looking at indices, Barclays in particular. We mainly look at industry and rating categories. Our relative value calls are based on spread. Too wide (cheap) / too tight (rich) to the index and to comparable issues. In the group I’m with, our recommendations are for issuers but we’ll point out specific issues that look more/less attractive.
You’re looking at credit curves for the ‘BBB’ Industrial Index, ‘BBB’ Tech Index, and HPQ bonds. HPQ is mostly trading wide of the Tech Index and trading wide of the broader Industrial Index.
Thanks. Let’s say I want to buy a specific bond, like IBM debt. For primary issuance I guess you need to know the investment bank that is doing the trade. If you want to buy in the secondary market, do you have to just know the specific dealer/bank that has the bond in their book? Or are the quotes compiled on BB with dealer information? Alternatively, if you want to sell your bond position, do you just express interest to some market maker? Or do you have to know specifically which counterparties X, Y, Z would be able to trade it?
The IBs that are underwriting the deals will send it out in the morning about an hour before the market opens (murder for folks on the west coast). We place our orders with them if we want to be involved.
For the secondary market, our sales coverage will send out runs in the morning. Bloomberg has a great tool (IMGR – GO) to sort out all the bonds you get in your mailbox. Our traders will contact the sales person if they want a particular bond, agree on the benchmark yield and spread, and execute the trade. I haven’t traded in a few years but I think Bloomberg has automated some of this. The traders have relationships with the sales people so they’ll call the traders sometimes before sending it out on Bloomberg.
The traders are working with 200 portfolio managers across our company so they’re constantly selling. They get a bid list together and send it out to our sales coverage. The traders will hit the best bid that comes in.
This process is different from the institutional side. I actually started in FI with a liquidity group that ran similarly to the institutional side. The PMs did their own trading and we would pull down much larger positions, $1mm on average I’d say instead of 50,100,200 bonds. Selling was also much less frequent.
The credit curves are spreads, y-axis is OAS. I think there are a couple of reasons why it’s so steep on the front end. First, the 2s/5s gov curve is the steepest it’s been since April of last year. Same goes for the 2s/10s curve. I’m sure most FI PMs are running modified barbells, heavy on the shorter end. Second, there are some hairy constituents in the ‘BBB’ Tech Index. DELL, HPQ, XRX, PBI to name a few. The credit risk is higher than normal at the moment.
I asked if they were spreads (though I actually figured that out by blowing up the picture and trying to read the axis - I still thought the conversation it would provoke could be interesting) in part because I thought maybe the steep part of the curve represented the increase in treasury rates with a relatively constant spread on top of it, but in fact the spread increases as well.
In the BBB ratings universe, it’s also true that rising interest rates in general could put the business at risk by raising the cost of capital, and so the spreads would probably widen there, to the extent that the treasury yield curve reflects future expectations. It would be interesting to see if you get a bump that big in spreads in the better-graded bonds.
There was a joke that went around the engineering school when I was in it.
What’s the limit of an engineering student as his/her GPA goes to zero? Business School.
I was a victim of this phenomenon but my limit was ECON.
I’d be the first one to admit that I’m a geek. I was hired by a geek and I work with a bunch of geeks. It’s a pretty sorry sight to see the FI research team together. We’re all bespectacled except the short guy that has a Napoleon complex. He wears contacts. One guy is a spitting image of Bert (&Ernie) and I swear all of us fight the urge to wear pocket protectors.
I think the real fireworks are going to be in high yield. It’s so over bought and a ton of spec-grade companies have pulled-forward their refinancing needs. As soon as rates go up and they hit their refinancing walls in a few years, watch out.
bchad, my understanding was this was due to the behavior of the hazard rate/probability of default over time. Basically you expect the company to be around tomorrow, a year or four out you’re a little less sure, further out conditional on it being around 4 years you’re probably going to expect it to continue to be around.
I still don’t’ get what the drive of this thread is? If you have a huge global issuance like IBM, trading in the secondary, you could probably hit a bid on any brokerage firms ecn aggregator and sell it immediately and not get busted too badly on the concession. No need to call or place a bid wanted with a desk. If you want to buy it’s the same thing. The desk at any brokerage is plugged into at least 200 dealers. Of course, if it’s a small amount of bonds, your broker will probably just buy it from you themselves.
Spunboy is always on point with fixed income. He was one of the only one’s to reply to a question of mine about premium bonds a while back. I love the mental image of a bunch of smart guys with pocket protectors discussing fixed income.
