the trader isVisit the Vault Finance Career Channel at http://finance.vault.com — withinsider firm profiles, message boards, the Vault Finance Job Board and more.
CAREERLIBRARY
51
Vault Career Guide to Sales & TradingFinancial Markets and Economics
caught long 50,000 shares ahead of a big economic number and getssandbagged, the boss is going to come over, which will be a very unpleasantway to start the morning. The trader will then turn to his assistant/juniortrader and yell at him until the stock starts to show signs of life, at which timethe yelling will subside. However, once the dead cat stops bouncing, thetrading assistant will get another earful.Salespeople need to know about economic statistics, because when theircustomers call up asking what the *&^% just happened to the futures, theyneed to be able to give an intelligent explanation.The bottom line is that aspiring traders and salespeople can do themselves abig favor by learning about the different economic indicators. Easiest way todo this? Pay attention in economics class and read The Wall Street Journal’sMoney & Investing section.
Figuring out what’s importantS&T professionals are inundated with information, but the good ones alwayshave one eye on the news ticker and can spot the important news items whiletrading a block of shares and picking up the intercom. This is especially trueof government releases of economic statistics. The government is alwaysreleasing statistics, but you need to be able to determine what is important tothe market. One way to do this while at a firm is to read some of the firm’seconomic research, which is always available on the in-house research notessystem. Reading this research will give you some idea of what the markethappens to be obsessed about at the time. Wall Street has a very short andlimited attention span and tends to focus on only several indicators at anygiven point in time. For example, if the market is worried about inflation,then everyone focuses on the consumer price index, the producer price indexand the employment cost index. If the market is concerned about a bubble inhousing prices, there will be a focus on housing starts and permits. If peopleare concerned about weakness in manufacturing, then they look at durablegoods orders, capacity utilization and the purchasing manager’s index. If themarket is concerned about a protracted recession, traders scruitinize weeklyjobless claims and the monthly employment report. The market is alwaysobsessed with something, so keep your eye on what the market cares mostabout at any given time. The bottom line is that while you don’t have tobecome an expert economist, good traders are able to recognize set-ups thatthey have seen before, and position themselves accordingly.52
CAREERLIBRARY
© 2004 Vault Inc.
Vault Career Guide to Sales & TradingFinancial Markets and Economics
The FedIf you’re interested in becoming a bond trader or salesperson, you need towatch the Fed. (Any S&T professional should watch the Fed, but fixedincome professionals especially so.) The Fed controls the money supply bychanging the reserve requirement (the amount that Federal Reserve Systemmember banks must hold in cash or on deposit with the Federal ReserveSystem, usually a percentage of their deposits), by conducting open marketoperations (buying and selling Treasuries) and most importantly, bycontrolling interest rates. The term “monetary policy” refers to the collectiveactions taken by the Fed to influence the cost of money and credit in line withnational goals. It is generally acknowledged that the principal goal of the Fedis to promote price stability (i.e., combat inflation and deflation). Note thatthe Fed is not responsible for keep unemployment low, or to keeping the stockmarket buoyant, although these are certainly very desirable goals.The Federal Open Markets Committee (FOMC) holds eight regularlyscheduled meetings per year. At these meetings, the Committee reviewsfinancial conditions throughout the economy, determines the appropriatestance of monetary policy, and assesses the risks to the economic outlook.The FOMC’s policy decisions are undertaken to foster the long-termobjectives of price stability and sustainable economic growth. Changes in thefederal funds rate trigger a chain of events that affect other short and longterm interest rates, foreign exchange rates, and the amount of money andcredit. Eventually, the economy responds with changes in employment,output, prices and the level of goods and services provided.
Fed watchingFed watching is an art. The Federal Reserve has typically been shrouded inmystery, and it is the job of highly paid economists and bond traders toascertain shifts in monetary policy by watching the Fed. Economists poreover the release of the FOMC’s minutes. Lately, a behavioral indicator thathas come into vogue is the “Greenspan briefcase indicator.” This indicatorsays that the thicker the briefcase Federal Reserve Chairman Alan Greenspancarries as he walks into the FOMC meeting, the more likely he is to cut rates.If the briefcase is thin, then Greenspan has very few charts and exhibits tosupport his proposal to cut or raise rates, so pundits expect no change inmonetary policy.Visit the Vault Finance Career Channel at http://finance.vault.com — withinsider firm profiles, message boards, the Vault Finance Job Board and more.
CAREERLIBRARY
53
Vault Career Guide to Sales & TradingFinancial Markets and Economics
S&T professionals typically focus on the change in interest rates, since openmarket operations are routine, and it is very rare for the Fed to change thereserve requirements. To anticipate the future course of monetary policy,traders scrutinize the flow of economic statistics. While certain figures aremore important than others at any given point in time, in general, the Fed willbe prompted to move in response to a series of strong or weak economicreports. A lot of money can be made by speculating on inflection points inmonetary policy. There is also money to be made on the continuation orabatement of a particular monetary policy.Traders and salespeople look at a variety of indicators, but one indicator thatis pervasive is the Fed funds future. The Federal funds interest rate is the rateat which banks charge each other for the use of Federal funds; the Fed doesn’tactually set this rate but effectively controls it by buying and sellingTreasuries to and from other banks. (The Fed actually sets the FederalReserve discount rate, which is the rate at which member banks may borrowshort term funds directly from a Federal Reserve Bank.) Fed fund futuresreflect the market’s opinion on the future course of interest rates. In advanceof a 2:15 p.m. Fed policy statement, you may have heard marketcommentators say that “the market is pricing in an 80 percent chance of a 25basis point cut in interest rates by the Fed.” How can this market opinion bequantified? Let’s assume that the current Fed Funds rate is 3 percent, and thatwe are in the month of February. The March Fed Fund futures are trading at2.80 percent (let’s ignore the cost of carry). 2.80 percent is 20 basis points(bps) below the current Fed Funds rate (100 basis points equals 1 percent).This means that the market is expecting the Fed Funds rate to be cut by 20bps, or 80 percent of 25 bps (the Fed normally moves in increments ormultiples of 25 bps).
Which Indicator?There are certain economic statistics that just never seem to generate muchattention. This can occur for several reasons. Sometimes the data that isbeing released is so old that it’s already old news. Economists have a fancyterm for this, it’s called a “lagging indicator.” One such example isconstruction spending. This data is released on the first business day of themonth for the two months prior. By this time, the market has already digestedhousing starts and new and existing home sales, and could care less about54
CAREERLIBRARY
© 2004 Vault Inc.
Vault Career Guide to Sales & TradingFinancial Markets and Economics
what happened two months ago. Another example is business inventories.Business inventories are an important component of GDP, but the marketstend to ignore business inventory releases. As with the construction spendingdata, business inventory releases are preceded by retail sales, factory ordersand a whole slew of other data points that gives us important clues into howinventories are shaping up. The market is always forward looking.Other indicators, such as the trade balance are just too abstruse. Traders havelimited attention spans, and can deal with monthly revisions, but conceptslike the trade balance are just too wishy-washy. The trade balance iscalculated as net exports. But the problem is that there’s a lot that’s open forinterpretation. For example, if the trade deficit comes in narrower thanexpected, then bond traders must contend with two conflicting and oppositefactors. A narrow trade deficit is good for the dollar, since fewer importproducers will be selling dollars. On the other hand, a narrower trade deficitmeans a higher net exports figure which is accretive to GDP and bad forbonds. Unlike most other indicators which are either good or bad, the tradedeficit is often pretty mixed. Enterprising economists will try and decipherthe trade deficit, but this generally produces a collective yawn from the firm’sbond traders.Although some indicators are not widely watched, many market mavens tryand simplify economic release data by focusing on one or two “magicbullets.” This is a very flawed methodology. As mentioned previously,different market conditions create anxiety and concern over differenteconomic indicators, so the skilled trader needs to know what the marketcares about at any given time and focus his efforts accordingly.
Gauging market reaction to economic indicator:Pricing in the newsTrying to make sense of economic indicators is tough, even for seasonedveterans. Understanding economic indicators is not just about knowing whata housing start is. The real challenge is taking into account where the marketis, and how the market will react to a given indicator. For example, if themarket is anticipating a lower than expected GDP report and has been sellingoff for four straight sessions in anticipation of this weakness, the traderdoesn’t look at the number and say, “Gee, that’s worse than expected, just likeI and everyone else expected, I better sell.” The trader tries to assess the
Visit the Vault Finance Career Channel at http://finance.vault.com — withinsider firm profiles, message boards, the Vault Finance Job Board and more.
CAREERLIBRARY
55
Vault Career Guide to Sales & TradingFinancial Markets and Economics
extent to which a particular market view is “priced into” the market andpositions himself accordingly.
Gauging market reaction to economic indicator:Headline riskSometime if you’re watching a market indicator, like the Treasury bondfutures, you’ll see a big move either up or down followed by an equallyviolent move in the opposite direction in a very short period of time. This isusually the market responding to the substantive nature of the economicreport.Economic reports are released to the newswire services showing up onyour Bloomberg or another terminal at your desk. You may seesomething like this:<<NOV. CPI + 3.7%>>Let’s assume the market was expecting 2.4%, so this is really a much higherthan expected consumer price index reading for November. Bonds sell off inearnest.Then several seconds later, the following headline comes up:<<NOV CPI ex food and energy + 2.1%>>The plot thickens here, since stripping out the volatile food and energycomponents from the CPI reading indicates that “core” inflation has increasedat a rate much lower than the initial headline number suggested. So nowbonds have stopped going down and are actually starting to spike.Shortly after the ex food and energy headline, another headline hits thetape:<<OCT CPI revised down to 1.8% from 2.2%>><<SEPT CPI revised down to 1.7% from 2.0%>>Now bonds are starting to rally through the roof. The downward revisions toprior months’ CPI readings is the fuel that causes shorts to cover and fortraders to press their long positions. The lesson here is that not only is themarket continuously pricing in expectations, it is also vulnerable to wild pricefluctuations when economic statistics are released. This tendency of prices togyrate wildly in response to the headlines is called “headline risk.”
56
CAREERLIBRARY
© 2004 Vault Inc.
Vault Career Guide to Sales & TradingFinancial Markets and Economics
IF THIS INDICATOR GOES UPGDP
BOND MARKET REACTIONDown
Initial jobless claims
Up
Payroll employment
Down
Unemployment rate
Up
Auto sales (car and truck)
Down
ISM purchasing managers’ index
Down
Factory orders
Down
Industrial production
Down
Capacity utilization
Up
Consumer confidence
Down
Housing starts
Down
New home sales
Down
Producer price index
Down
Consumer price index
Down
Durable goods orders
Down
Retail sales
Down
Personal income
Down
Personal spending
Down
Leading economic indicators
Down
Non-farm productivity
Up
Unit labor costs
Down
The Stock MarketYou may wonder how the stock market reacts to these economic indicators.First, let’s remember that the stock market tends to do best when corporateearnings are increasing. This tends to happen when the economy is chuggingalong with minimal inflation. On the other hand, the bond market actuallydoes best when the economy is slowing down or in a recession. Tounderstand this, remember that bonds pay their investors a fixed rate. Whenthe economy is in the dumps, the Fed will most likely cut interest rates,making the value of existing bonds greater (because newly issued comparablebonds will carry a lower coupon rate). Inflation is a bond investor’s worstenemy, because it erodes the real return of the bond’s coupon income.
Visit the Vault Finance Career Channel at http://finance.vault.com — withinsider firm profiles, message boards, the Vault Finance Job Board and more.
CAREERLIBRARY
57
Vault Career Guide to Sales & TradingFinancial Markets and Economics
Therefore, the stock market will typically move in the opposite direction asbonds.
Earnings seasonThe equivalent of Fed watching for the stock market is earnings season. Oneof the primary responsibilities of a trading assistant is to keep a calendarmarked with all the earnings release dates for the current quarter. A tradingassistant’s nightmare is to come into work one day and find that one of thestocks he or she covers is down $27/share. The stock actually went outyesterday at $50/share, so the market cap has been cut by more than half. Thetrading assistant then looks at the position monitor and notices a big positionin the same stock. The trader barks at the assistant asking what the hell isgoing on in the stock. The assistant furiously checks through the news andfinds the following headlines on Bridge (a financial news service):<PRE-ANNOUNCES Q1 REVENUE SHORTFALL><CFO: ORDER SHIPMENTS FELL OFF IN THE LAST WEEK OF THE QUARTER><CFO: LACK OF ORDER VISIBILITY DUE TO ONGOING ECONOMIC WEAKNESS><REDUCING Q1 REVENUE AND EPS DOWN BY 50%><SUSPENDING FULL YEAR REVENUE AND EARNINGS ESTIMATES>
The trader has been blindsided, and after the trader finishes ripping into theassistant, the hapless assistant will be demoted to fetching coffee for an entiremonth. Don’t let this happen to you. Contact firm analysts and get an ideaof when each company is expected to report and what the consensus estimateis. You also need to be clear on the timing of the release. It does you no goodto know that Electronic Darts (EDTS) will be releasing its number on the 27thif they report before the market opens (and you were expecting the reportafter the market closes). Earnings reporting calendars are also available on anumber of commercial web sites – if you still can’t find the date, then call thecompany’s investor relations department.You should also be vigilant the month before the earnings are due to bereleased. This is the pre-announcement season, when companies have anopportunity to confess to lower earnings and revenues ahead of the scheduledearnings release. Supposedly, it is better for the company to inform the WallStreet analyst community of a shortfall well in advance of the earnings releasedate. Though it may be proper etiquette, it is also a kiss of death for mostcompanies – the stock will subsequently take a significant hit. If the trader
58
CAREERLIBRARY
© 2004 Vault Inc.
Vault Career Guide to Sales & TradingFinancial Markets and Economics
asks you why the stock is down, you win by being the first to give him thescoop. If you are able to briefly relay to him the magnitude of the shortfalland how bad the number is, then you help your trader look good, and in theend, this can only be good for you. Get to know the firm’s research analystcovering your sector, solicit his or her opinions, and be sure to pass alongnoteworthy information to your trader. The enterprising assistant will get into work extra early during pre-announcement and earnings season exactly forthis reason.Not all pre-announcements are bad. Positive pre-announcements aresituations where earnings are exceeding prior guidance. Again, the tradingassistant should proactively gather and disseminate this information.Be careful: occasionally stocks do not always react as expected. Sometimesstocks move up on bad news and vice versa. There can be several reasons forthis, but one reason is that traders are especially aware of the situation wherethe news has “already been priced into the price.” For example, say a firmpre-announces earnings short of expected earnings for the fifth-consecutivequarter. Perhaps it is the portfolio’s manager opinion that all the bad newshas been priced into the shares of the stock, and the bad news is actually goodnews in the sense that all the sellers will have probably already sold. Tradershave much shorter time horizons, but the same logic applies. If a stock istrading down a substantial amount in the pre-opening market, then the tradermay decide that at this point, the selling is overdone and that he should bebidding aggressively to catch the anticipated bounce in the share price.However, a trader may buy in a situation in which he believes that a stock’sdepressed price more fully reflects the negative news, only to see the stockcontinue to plummet. The trader has caught the proverbial falling knife.
Visit the Vault Finance Career Channel at http://finance.vault.com — withinsider firm profiles, message boards, the Vault Finance Job Board and more.
CAREERLIBRARY
59
Financial ProductsCHAPTER 5Theoretically, a good trader should be able to trade anything and a goodsalesperson should be able to sell anything. Still, a lot of thought does go intothe product you end up trading or selling. Wall Street is constantly dreamingup new products to meet the needs of its clients – this process eventuallycreates a need for these firms to support the active trading of these productsin the secondary market. What follows is a brief description of the majorproduct categories. This is not a comprenhensive list, but should give you asense of the major product categories.
Equity and Equity-Related ProductsEquity markets provide a liquid market for the orderly trading of ownershipinterests (i.e., shares) in public companies. Shares are issued to investors whothen have a stake in the company represented by a stock certificate. Listed orblock trading involves all stocks traded on the New York Stock Exchange(NYSE), which prides itself on listing the biggest and best companies fromaround the world. The other major market for cash equities is the NASDAQ,which is home to both the best and the worst of the technology sector.In addition to the different listing requirements of each exchange, there is alsoa fundamental structural difference between the NYSE and the NASDAQ.
The New York Stock Exchange: the specialistsystemHistorically, equities have traded on the New York Stock Exchange (NYSE),the NASDAQ marketplace or the American Stock Exchange. The NYSE hastypically attracted the largest “blue-chip” companies in America and hassuccessfully expanded its listings to include such large foreign companies asNokia and DaimlerChrysler. The NYSE is constantly rumored to be chasingafter Microsoft (currently listed on NASDAQ) and has even reserved theticker symbol “M” if Bill Gates ever has a change of heart.In the NYSE, all orders are routed to the exchange floor. Floor brokers (alsocalled “$2 brokers” because they used to charge $2 per trade) receive ordersfrom traders working for investment banks and brokerage firms. Traders
Visit the Vault Finance Career Channel at http://finance.vault.com — withinsider firm profiles, message boards, the Vault Finance Job Board and more.
CAREERLIBRARY
61
Vault Career Guide to Sales & TradingFinancial Products
work on the desk and relay orders from salespeople and investors to the floorbrokers or through a computerized order entry system (SuperDot, a smallorder executing system owned by the NYSE). Floor brokers represent buyersand sellers and gather near a specialist’s post on the exchange floor to placebuy and sell orders on behalf of their clients.The specialist is the one professional responsible for a given stock (forexample, IBM). He is responsible for matching up customer orders andproviding liquidity when there is a buy or sell imbalance. These specialistswork for NYSE specialist firms, who must have a seat on the exchange. Thespecialist is responsible for maintaining an orderly market in the security thathe trades. Order is primarily achieved through the maintenance of an orderbook that indicates buy and sell orders at every market level. When stockshave a delayed opening, it is because there is a buy or sell imbalance, and thespecialist will open the stock at the price where the most number of shareswill transact. The NYSE argues that having one specialist maintains anorderly and fair market. Critics charge that the NYSE is a monopolymasquerading as a good corporate citizen.The AMEX is a small-scale version of the NYSE. The AMEX has lessstringent listing requirements and has recently gained prominence for itsdominant market share in the QQQ, the NASDAQ 100 index trust that is thespeculative vehicle of choice for the technology investor.
The NASDAQ marketplace: Over-the-counterequitiesThe National Association of Securities Dealers Automated Quotation,commonly known as the NASDAQ, was created in 1971 as the world’s firstelectronic stock market. The NASDAQ system is not an exchange – ordersdo not go through specialists. Instead, it is a decentralized screen-basedsystem of interconnected terminals, through which dealers continuouslyupdate price quotations on approximately 5,x000 over-the-counter securities.Although the NYSE has the largest market capitalization of any stock marketin the world, the NASDAQ actually is home to more issuers. Dealers are
62
CAREERLIBRARY
© 2004 Vault Inc.
Vault Career Guide to Sales & TradingFinancial Products
responsible for maintaining quotes in the box and must honor their displaysize. A quote for Microsoft might look something like this:
Microsoft corporation:MLCO: 23.05 –
100 – 1
GSCO: 23.07 –
1 – 199
MSCO: 23.05 –
56 – 10
ISLD:
23.07 –
5 – 150
CSFB:
200 – 5
PWJC: 23.08 –
10 – 20
23.03 –
The “inside quote” on Microsoft in this example is 23.05 – 23.07 100x199.Inside quotes are overall market quotes that represent the best bids and offers.In this case, Merrill Lynch is the best bid and Goldman is the best offer. Thesize of the market is 10,000 shares by 19,900 shares. If the bid is hit thenMSCO stands ready to buy 5600 shares, and if Goldman is lifted, then Islandhas 15,000 shares for sale. Common misconduct that occurs is that the dealer“backs away” from his quote. In this example, Goldman is offered for 19,900shares. Say you have 25,000 to buy for a client and you ask for 19,900, butthe Goldman dealer only agrees to sell you 10,000 shares. Goldman makesthe argument that a customer or a competitor was ahead, while you make theargument that Goldman isn’t honoring his market and you call NASDAQmarket regulation to settle the dispute.
Risk Arbitrage (“merger arbitrage”)Risk arbitrage is focused on profiting from the eventual consummationof announced public mergers. The risk premium is defined as the spreadthat exists between the announced terms of the deal and the actualprice at which the target firm is trading. Transactions with higherperceived deal risk (risk that the deal will not actually go through) tradewith wider spreads (i.e., the risk premium) and less risky deals tradewith tighter spreads. As the deal is ultimately consummated, thisspread is eliminated and the risk arbitrage desk makes the difference.A risk arbitrage trade exampleDisco Systems announces a deal to buy Southern Telecom. Discoagrees to exchange 1 of its shares for 2 shares of Southern Telecom.Following the announcement of this proposed transaction, Disco sharesare trading at $20/share, and Southern Telecom is trading at $7/share.According to the terms of the transaction, Southern Telecom shouldtrade at $10/share. If the deal is consummated as announced, the
Visit the Vault Finance Career Channel at http://finance.vault.com — withinsider firm profiles, message boards, the Vault Finance Job Board and more.
CAREERLIBRARY
63
Vault Career Guide to Sales & TradingFinancial Products
enterprising risk arbitrageur can make an expected profit of $6 bybuying 2 shares of Southern Telecom and shorting 1 share of Disco.The risk arbitrageur is in the business of collecting these small riskpremiums from numerous announced transactions. All else being equal,the risk arbitrageur makes money as the risk premium narrows overtime.This expected narrowing of the spread does not alwaysmaterialize. If the closing date of the deal is extended, then the spreadwidens to reflect the decreased probability of the deal closingsuccessfully. If the deal is busted (i.e., target and acquirer fight or theFederal Trade Commission blocks the proposed deal), then thearbitrageur will normally get crushed. The goal of the risk arbitrageur isto collect more in risk premiums then he loses in occasional blow-ups.
Fixed Income SecuritiesGovernments, corporations, agencies, organizations, supra-nationals andfinancial institutions issue bonds to fund their activities. Bond marketfinancing doesn’t represent an ownership stake, but rather an IOU withinterest. A few corporate bonds trade on the NYSE, but generally speaking,the fixed income market is an over-the-counter market. Within this vast overthe-counter market, screens and telephones facilitate trading activity.Institutional customers call dealers who trade order flow (dealers whose goalis to provide liquidity for customers rather than trade on proprietary accounts)based on the real-time information that is continuously updated on thesebroker-maintained screens. Phone-based OTC markets function throughtelephone calls. The institutional customer calls the broker-dealer who in turncalls brokers to see what type of inventory is available for sale or for purchaseon the Street.Fixed income instruments can be traded as either negotiable or nonnegotiable. Non-negotiable loans are private transactions between twocounterparties. Since these are private transactions, there’s not much need fortraders or salespeople to get involved, so just know that this market categoryexists. The other major market segment is comprised of negotiable debtinstruments, which trade on secondary markets after they have been issued bythe borrower. These instruments include bonds and notes, and structuredsecurities such as asset-backed and mortgage-backed securities. Negotiablefixed income instruments also include a class of instruments called
64
CAREERLIBRARY
© 2004 Vault Inc.
Vault Career Guide to Sales & TradingFinancial Products
derivatives, which derive value from an underlying market variable such asLIBOR.Another way of segmenting the bond market is to broadly divide the universeof fixed income products into two groups: government bonds and spreadproducts. Government bonds are issued by the U.S. Treasury and are the riskfree standard backed by the full faith and credit of the United Statesgovernment. Spread products are bonds issued by any other issuer-agencies,corporations, foreign governments and supra-national organizations. Spreadproducts have additional default risk, and are quoted as a “spread overcomparable Treasuries” that is, the difference in yield when compared to atreasury board of the same term. For example, if a 10-year U.S. Treasurybond offers a 3% yield and a 10-year IBM bond offers a 3.5% yield, thespread is 0.5%.
Government bonds (“Govies”)U.S. Treasuries are the benchmark against which all other fixed incomeproducts are priced. If you enjoyed economics in college, this might be agreat product area for you. Government bond desks are organized bymaturity. “Treasury bills” are government bonds with a maturity of 1 year orless. The Treasury issues 3-month, 6-month and 1-year Treasury bills, whichare discount securities that pay par at maturity. (The bills pay a set amount abit above the original purchase price; this amount is called the par value ofthe security.) “Treasury notes” are securities that have a maturity exceeding1 year but not exceeding 10 years. “Treasury bonds” (10- and 30-year bonds)are the longest-dated maturity instruments issued by the Treasury. Notes andbonds are both conventional semi-annual coupon-paying securities. SinceOctober of 2001, the Treasury has suspended issuance of the 30-year “long”bond. The new long bond is the 10-year Treasury bond. The Treasury alsoissues STRIPS (Separate Trading of Registered Interest and Principal ofSecurities), or zero-coupon bonds. These securities allow investors to holdand to trade the individual interest and principal components of eligibleTreasury notes and bonds as separate securities. A recent addition to theTreasury product are TIPS (Treasury Inflation Protected Securities) whichpay interest based on the level of inflation.The shortest maturity products are like trading with training wheels. It’stough to screw up if you’re a 3-month bill trader or repo trader. (Repo andreverse repo are the business of borrowing and lending securities.) TheVisit the Vault Finance Career Channel at http://finance.vault.com — withinsider firm profiles, message boards, the Vault Finance Job Board and more.
CAREERLIBRARY
65
Vault Career Guide to Sales & TradingFinancial Products
seasoned veterans are on the long end of the curve, trading 10- and 30-yearbonds – these instruments have the most price volatility for a given change inyield. Long-dated zero coupons are the most price volatile instruments in thegovernment bond market, since the full value of the bond is received as abullet at maturity.While U.S. government bonds do not have any default risk, do not mistakethis for meaning that bonds are risk-free investments. Even with the full faithand credit of the U.S. Treasury, govies are interest-rate sensitive, and theprincipal can fluctuate dramatically in different interest rate environments.However, for buy-and-hold investors, there is no interest rate risk, since theprincipal is fully returned at maturity.
Agency bondsFederal government agencies issue bonds to finance their activities. Theseagency bonds help support projects relevant to public policy, such as far