What is Fixed Income Trader?
A fixed income trader is a financial intermediary that trades in fixed income securities such as government or corporate bonds, notes or bills either for personal investments or for the clients of his employer, an asset management company.
In the trading profession, most traders or asset management companies specialize in one particular domain on investment based on the knowledge and resources they have at their disposal or depending upon the kind of market or clientele they want to deal with. Therefore, there are categories such as a trader in commodities, equities, alternative investmentsAlternative InvestmentsA financial asset that is different from the conventional investment categories such as stocks and cash is referred to as an alternative investment. Private equity, hedge funds, venture capital, real estate/commodities, and tangibles such as wine/art/stamps are all examples of alternative investments., fixed incomeFixed IncomeFixed Income refers to those investments that pay fixed interests and dividends to the investors until maturity. Government and corporate bonds are examples of fixed income investments., or derivativesDerivativesDerivatives in finance are financial instruments that derive their value from the value of the underlying asset. The underlying asset can be bonds, stocks, currency, commodities, etc. The four types of derivatives are - Option contracts, Future derivatives contracts, Swaps, Forward derivative contracts. .
Responsibilities of a Fixed Income Trader
- If the fixed income trader is dealing with his own investment portfolio, then he may have to do several hats, such as that of the trading strategy developer, portfolio managerPortfolio ManagerA Portfolio Manager is an executive responsible for making investment decisions & handle investment portfolios for fulfilling the client’s investment-related objectives. Also, he/she works towards maximizing the benefits & minimizing the potential risks for clients. , and trade executioner.
- If he works for a boutique investment firm, then he might have to work with a portfolio manager who has the responsibility of deciding how much of the portfolio goes into which type of securities after analyzing the IPS of the clients, and within the domain, the strategy is developed by the trader who undertakes the execution to fulfill this strategy.
- However, if the firm is a large asset management group such as BlackRock, then there is a greater division of labor, and in such a case, there might be a separate strategy department to manage the high quantum of assets they possess.
- Such firms have a fiduciary duty, which implies that the clients give them discretion on their investments, and therefore they need to act in the best interest of the clients. In such an environment, the trader largely plays the role of trade executioner.
- Apart from the execution responsibility, the trader needs to keep a constant eye on the portfolio performance and see whether the portfolio has drifted from the goals set in the IPS and the trading strategy specified. If such is the situation, then it is the duty of the trader to rebalance the portfolio and bring it back on track.
Therefore, the role of the trader can be summarized as per the following smart art:
At the core, we have execution, and secondary to that, and we have monitoring and rebalancing. Apart from these two responsibilities, high-level roles of strategy development and portfolio management are as per the quantum of the portfolio, the larger the quantum, the lesser are the chances that these two responsibilities will fall under the purview of the trader.
Skill Required to Become a Fixed Income Trader
#1 – Technical knowledge
The trader should understand the valuation of fixed income investmentFixed Income InvestmentFixed income investment is a type of investment in which the investor receives a fixed and relatively stable stream of income in the form of dividends or interest over a period of time. Companies and governments typically issue fixed investments in the form of debt securities. and their payoffs very well. There is a wide range of products encompassed by in this domain, such as government and corporate debt, Collateralized Debt ObligationCollateralized Debt ObligationCollateralized debt obligation (CDO) refers to a finance product offered by the banks to the institutional investors. Such tranches have a complex structure and derive their value from the various underlying assets like loans, mortgages and corporate bonds, which also serve as collaterals in case of default. (CDO), Collateralized Mortgage ObligationCollateralized Mortgage ObligationCollateralized Mortgage Obligations (CMOs) are a debt-security type that combines many mortgages & sell them as a single investment. Cash flow occurs when debtors repay the loans, following which the CMO investors get their returns. (CMO), Collateralized Loan Obligation (CLO), Mortgage-backed securities (MBS) or Asset-backed securitiesAsset-backed SecuritiesAsset-backed Securities (ABS) is an umbrella term used to refer to a kind of security that derives its value from a pool of assets, such as bonds, home loans, car loans, or even credit card payments. (ABS) such as the bonds backed by credit card loans or student loans and so on.
#2 – Market Knowledge
- Fixed income securities do well when the economy is slow. This is so because in this period, the interest rates are higher, and as the prices of the fixed income securities are inversely related to the interest rates, this is the time when such securities can be bought at a lower price. When the economy picks up, interest rates reduce, prices increase, it is a good time to sell fixed income securities and invest inequities. So the trader needs to take care of the market environment and factor such changes into his investment strategies.
- Further, yield curve analysisYield Curve AnalysisThe Yield Curve Slope is used to estimate the interest rates and changes in economic activities. It is a plot of bond yields of a particular issuer on the vertical axis (Y-axis) against various tenors/maturities on the horizontal axis (X-axis). is an effective tool for predicting which way the economy will go in the future, and therefore a way of predicting recession or book cycles. So it can help in timing the market.
- Therefore the trader needs to follow the market and try to execute the deal that is in the best interest of the clients.
#3 – Movement Analysis
As mentioned above, monitoring and rebalancing is an important aspect of the roles and responsibilities of the trader. Therefore he should have the skills to analyse the market as and when it moves away from his predictions and take charge of rebalancing the portfolioRebalancing The PortfolioPortfolio Rebalancing is reallotment of the assets according to their performance in the past period and desired results. This is done by divesting in the low performing assets and investing more in the best performing ones. accordingly.
Education & Qualification
- Having a degree in the Finance domain betters the chances of an aspirant becoming a Fixed income trader. These degrees can range from a Bachelor’s in Business Administration with a Finance specialization to a Master’s degree in the same domain. A certification such as the Chartered Financial AnalystChartered Financial AnalystThe Chartered Financial Analyst (CFA®) Program offers a graduate-level curriculum and examination program designed to expand your working knowledge and practical skills related to investment decision-making. (CFA) or a CA Full FormCA Full FormCA or Chartered Accountant is an accounting professional authorized to audit books of accounts and present an honest opinion based on the examination so done. Every country has a government regulated body which has its own criteria to authorize such professionals. (CA) can give the aspirant a wide knowledge base to understand the concept of the technical framework behind the instruments available in the market.
- The subjects that the aspirant needs to have a good hang of should include Finance, Economics, Statistics and Probability, Mathematics among others, and presently, good background in Behavioural Finance acts as an added advantage because that helps in situational and psychological profiling of the clients whose investments are being managed by the trader.
- In the US, as per the guidelines of FINRA, there are several qualification exams for various domains of securities trading, ranging from those required in the fields of government securities to municipal securities to corporate debt. Some are representative level exams such as the Series 7 exam while some are principal level exams, and others are association exams such as Series 63. A company may require clearing these exams for trading, and therefore the aspirant needs to understand the company policy or contact the Human resource executive to understand the eligibility requirement.
- A fresher can start with an analyst position and rise up to senior positions as his experience increases to 5-7 years. The job description of a company may suggest the required skills of Bloomberg Terminal, Financial analysis, Market research, Data modeling, and so on.
As for any job, the salary can vary from one region to another depending upon several factors such as the cost of living, job requirements, growth prospects, industry standards, and so on. However, as per payscale.com, the average salary is $89,396 before taxes and deductions and the additional compensation such as bonuses and profit-sharing components, which may depend on the company policy.
- Fixed income trading is a perennial profession as no matter how well an economy does, and there is always a demand for fixed income instruments because every investor wants some portion of her money to be invested in secure investments for saving up for a comfortable retired life.
- The job prospects increase when the economy is slowing down and reduce modestly when it is booming but do not get eliminated completely.
- Further, the demographics of the country also determine whether there is an uptrend in the job prospects because when there is a higher demographic dividend, that is, the population is younger, they can bear the risks and therefore, investment in equity increases such as the population of India, but when the population is aging, investment in fixed income securities increases, such as the case with Japan.
This has been a guide to What is Fixed Income Trader & its Definition. Here we discuss the skill required to become a fixed income trader and responsibilities along with education, salary & job prospectus. You can learn more about from the following articles –