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Fixed Income - Trading, Investing and Risk Management

Duration: 3 days
  • Recent Trends in Fixed Income Markets
  • Trading the Yield Curve and Portfolio Strategies
  • Arbitrage and Relative Value Strategies
  • Currency Hedged Strategies
  • Investing in Bond-Backed Structures
  • Using Derivates in Fixed Income Trading
  • Credit Trading and Investing
The objectives of this seminar are to present a number of advanced bond trading, investing and hedging strategies and to give you a good understanding of how to effectively implement these strategies in practice. We will also give an overview of recent trends in FI markets and discuss how these changes affect market participants.

After a brief review of yield curve analysis we explain and demonstrate how different views about the level and shape of the yield curve can be exploited through repo trading, “tailing”, yield spread trades, flatteners/steepeners, dumbbells/bullets, butterfly trades, etc.

Next, we look at selected arbitrage and relative value trades, including on-the-run/off-the-run trades, Treasury/Corporate spreads, investment-grade/high yield, convertible arbitrage, and international bond spreads with various currency hedging strategies.

We then explain the role of futures and other derivative instruments in trading, hedging and portfolio management. We explain the link between the cash and futures markets and demonstrate how “Basis Trades” and “Futures Spread Trades” can be constructed to exploit market mispricings - or to implement differing views on interest rates. We also show how futures/options/swaps can be used effectively to implement “Directional” bets or “Sector Switching”.

Further, we explain the concepts of “Strips”, “Collaterized Mortgage Obligations”, and other types of bond derivative structures, and we discuss the opportunities and risks of investing in these products. We also explain and demonstrate how to implement “correlation trades” using single-name, basket, and index CDS.

Finally, we look at techniques for investing in investment grade bonds, high yield corporate bonds and emerging markets bonds. Investment techniques in this area include the use of portfolio diversification techniques, “Asset Swaps”, securitization, and credit derivatives.

Day One

09.00 - 09.15 Welcome and Introduction

09.15 - 12.00 Introduction to Bond Trading and Investing

  • Fixed Income Markets and Participants
  • A Framework for Assessing Fixed Income Trading Strategies
  • Overview of Trading and Hedging Tools
  • Fixed Income Trends and Trading Opportunities in the Post-Crisis Environment

Trading the Yield Curve

  • Brief Review of Yield Curve Analysis
  • Repo Trading and “Tailing”
  • Margin Trades
  • Yield Spread Trades
  • Curve Flatteners and Steepeners
  • Dumbbells/Bullets
  • Barbells and Butterflies
  • Pure Duration Bets
  • Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Portfolio Strategies

  • Portfolio Barbells
  • Portfolio “Butterflies”
  • Credit Barbells
  • Immunized Portfolios
    • Traditional immunization (single-factor)
    • Multifactor-immunization
  • Strategies Based Upon “Key Rate Duration”
  • Laddered Portfolios
    • Why laddered portfolios can outperform other bond strategies
    • Building a portfolio of bonds with staggered maturities
    • Maintaining the ladder through reinvestments
  • Exercises

Day Two

09.00 - 09.15 Recap

09.15 - 12.00 Arbitrage and Relative Value Strategies

  • Identifying and Exploiting Arbitrage Opportunities through “Cheap/Rich” Analysis
  • On-the-Run/Off-the-Run Trades
    • Case study: LTCM
  • Cross-market and Sector Switches
    • Domestic and international
  • Convertible Arbitrage
  • Asset Swaps versus Straight Bond Arbitrage

Currency Hedged Strategies

  • Sources of Return on Foreign Bonds
  • Unhedged Foreign Bond
  • Cash Flow Hedged Foreign Bond
  • Present Value Hedged Foreign Bond
  • Cross Hedged Foreign Bond
  • Proxy Hedged Foreign Bond
  • Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Investing in Bond-Backed Structures

  • Treasury Strips
    • “STRIPS”
    • “RECONS”
  • Mortgage Strips
    • Collaterized Mortgage Obligations
    • Targeted amortization classes
    • Planned amortization classes
    • IO/PO strips
    • Inverse Floaters
  • Collaterized Bond Obligations
    • Funded structures
    • Synthetic CBOs
    • Hybrid structures
  • Credit Correlation Trades
  • Exercises

Day Three

09.00 - 09.15 Recap

09.15 - 12.00 Using Derivates for Fixed-income Trading, Investing and Hedging

  • Advantages and Disadvantages of Using Derivates
  • Using Futures in Bond Trading and Hedging
    • Outright trades and basis trades
    • Calendar spreads (straddles)
    • Intermarket spreads
    • Hedging single positions and portfolios
    • Dynamic portfolio hedging
  • Using Options in Bond Trading and Hedging
    • Directional and Volatility trading
    • Using “Quanto” options to hedge dynamic currency risk etc.
  • Using Swaps and other Derivatives
    • Creating synthetic, capped and floored cash flows
  • Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Credit Trading and Investing

  • Investment Grade vs. High-Yield Bonds
  • Understanding the Credit Risk of Corporate Bonds
  • Credit Spreads and Credit Curves
  • Calculating the Fair Credit Spread
  • Credit Derivatives and their Applications
    • Closer look at Credit Default Swap (CDS)
    • Hedging or leveraging credit risk
    • Shorting credit risk
    • Creating synthetic corporate bonds
    • CDS curve strategies and trading
  • Investing in Distressed Debt
  • Investing in Emerging Market Bonds
    • Opportunities, risks and strategies
  • Exercises

Evaluation and Termination of the Seminar