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A unique, authoritative, and comprehensive treatment of fixed income markets Fixed Income Trading and Risk Management: The Complete Guide delivers a comprehensive and innovative exposition of fixed income markets. Written by European Central Bank portfolio manager Alexander During, this book takes a practical view of how several different national fixed income markets operate in detail. The book presents common theoretical models but adds a lot of information on the actually observed behavior of real markets. You'll benefit from the book's: * Fulsome overview of money, credit, and monetary policy * Description of cash instruments, inflation-linked debt, and credit claims * Analysis of derivative instruments, standard trading strategies, and data analysis * In-depth focus on risk management in fixed income markets Perfect for new and junior staff in financial institutions working in sales and trading, risk management, back office operations, and portfolio management positions, Fixed Income Trading and Risk Management also belongs on the bookshelves of research analysts and postgraduate students in finance, economics, or MBA programs.

Fixed Income Trading and Risk Management: The Complete Guide

Foreword xvPart One PreliminariesChapter 1 Introduction 3Chapter 2 Money, Credit and Banking 92.1 Abstract properties of money 92.2 Early forms of money 112.2.1 Paper money and bank notes 142.3 Fiat money 152.3.1 Fiat money and trade 15Chapter 3 Banks 173.1 Banks and bank money creation 173.2 Categories of banks 18Chapter 4 Bank Money Creation 204.1 Single-bank introduction 204.2 Extension to multiple banks 224.3 Transfer settlement in central bank money 254.4 Trade and non-bank credit 284.4.1 Non-cash trading instruments 294.4.2 Discounting 304.4.3 Delineating payment instruments from money 304.5 Digital token monies and cryptocurrencies 314.6 The money multiplier 32Chapter 5 The Role of Central Banks 345.1 Introduction 345.2 Monetary financing 39Chapter 6 Monetary Policy 406.1 Objectives of monetary policy 406.2 Monetary policy under inflation targeting 436.3 Central bank operational frameworks 466.3.1 Symmetric interest rate corridors 476.3.2 Asymmetric lending corridors 49Chapter 7 Operational Frameworks 507.1 Control of the money supply 507.2 Liquidity provision: Rediscounting, outright purchases and Lombard lending 517.3 Liquidity absorption: Asset sales and reverse repos 527.4 The impact of FX operations 52Chapter 8 Interaction between Frameworks and Policy 548.1 Volatility 548.2 Collateral 55Chapter 9 Non-Standard Monetary Policy 579.1 Quantitative easing 579.1.1 The Monetary Effect of Large-Scale Asset Purchases 619.1.2 Market liquidity and central bank asset purchases 629.1.3 Helicopter money 639.1.4 Choice of methods and assets 659.2 Practical experience 679.2.1 QE, money multipliers and FX 679.2.2 Bank of Japan 2013 QE experience 719.2.3 Lessons from the initial BoJ quantitative easing 729.3 Negative interest rates 739.4 The specific situation of the ECB 74Part Two Cash InstrumentsChapter 10 Contract and Instrument Types 7910.1 Securities and bilateral contracts 7910.2 Security identifiers 8110.2.1 ISIN codes 8110.2.2 CUSIP codes 83Chapter 11 Trading and Settlement 8511.1 Trading 8511.1.1 Trading and price formation 8511.1.2 Trading venues 8611.1.3 The OTC trade lifecycle 87The trade inquiry 89Negotiation 89Agreement 90Recording 91Enrichment 92Reporting 92Pre-confirmation 93Allocation 93Confirmation 94Settlement instructions 94Fails 95Reconciliation 9611.1.4 The exchange trade cycle 9611.1.5 Trading in competition versus single dealer inquiries and orders 97Mistrades 9811.2 Settlement 9811.2.1 Settlement mechanisms 9911.2.2 Settlement conventions 99Chapter 12 Central Clearing 10112.1 Direct clearing 10112.2 Indirect clearing 10612.2.1 Agency clearing 10612.2.2 Principal clearing 10712.2.3 Hybrid clearing models 10712.3 Contract value adjustments (xVA) 10812.3.1 Credit Value Adjustment 10812.3.2 Funding Value Adjustment 10912.3.3 Debit Value Adjustment 110Chapter 13 The Money Market 11113.1 Money market instruments 11113.2 Discount factors 11213.3 Daycount conventions 11413.4 Money market interest rates 11513.5 Compounding 11613.6 LIBOR, Euribor, and friends 11713.7 Overnight benchmarks 11913.8 Benchmark reform 12013.9 Money market futures and futures trading 12113.9.1 Money market futures 12113.9.2 Identification of futures contracts 12213.9.3 Futures trading basics 12413.9.4 Convexity adjustment 124Chapter 14 The Repo Market 12614.1 The repurchase market 12614.2 Haircut 12814.3 Variations of repurchase transactions 12814.4 Rehypothecation 130Chapter 15 Spot and Forward Rates 13115.1 Forward rates 13115.2 No-arbitrage calculations 13115.3 Official rates versus term rates 13315.3.1 The turn premium 13315.3.2 Matching policy expectations to market rates 134Chapter 16 The Bond Market 13716.1 Introduction 13716.2 Cashflow types 13816.2.1 Bullet bonds 13816.2.2 Zero coupon bonds, perpetuals and annuities 13916.3 Issuer types 14216.3.1 Joint issuance 14416.3.2 Supranationals 14616.4 Governing law and contractual clauses 14716.5 Bond markets 15116.5.1 The primary market 15316.5.2 The secondary market I: (interdealer market) 15716.5.3 The secondary market II: (customer-facing market) 15816.6 Accrued interest 15816.7 Yield 15916.7.1 Running yield 16016.7.2 Simple yield 16016.7.3 Compound yield 16016.7.4 Bond-equivalent yield 16116.8 Interest rate risk 16316.9 Convexity 16416.10 Bond value decomposition 16516.11 Carry 167Chapter 17 Floating-Rate Notes 16917.1 Coupon reset mechanics 17017.2 Libor and OIS-linked notes 17117.3 Discount margin 17317.4 CMS and CMT floaters 174Chapter 18 Asset Markets and Liquidity 17618.1 Concepts 17618.2 Liquidity measurement 18018.2.1 Taxonomy of liquidity measures 18118.3 Examples 18318.4 Liquidity premium 18518.5 Liquidity and volatility 187Chapter 19 Curves and Curve Models 18919.1 Models 19019.2 Yield curve representation and interpretations 19119.2.1 Discount factors versus par curves 19119.3 Market-based curve representations 19319.3.1 Bootstrapping 19319.3.2 Reverse bootstrapping 19519.4 Parametric curve models 19619.4.1 The Nelson-Siegel and Nelson-Siegel-Svensson splines 19719.4.2 Polynomial splines 19819.4.3 The exponential spline 19919.4.4 The Vasicek spline 20019.4.5 Composite models 20219.5 Fitting curve models 203Chapter 20 Curve Analysis 20520.1 Expectations 20520.2 Convexity bias 20920.3 Term risk premium 21120.4 Preferred habitat 21220.4.1 Asset-liability matching 21220.4.2 Regulatory constraints 21320.4.3 Passive investing 21420.4.4 Central bank reserve portfolios 21520.4.5 Market technicals 215Chapter 21 Carry and Roll-Down 217Chapter 22 Curve Spreads 22022.1 Z-spread 22022.2 Par spread 22122.3 Swap spreads 22222.3.1 Asset swap spreads 22222.3.2 I-spreads 22322.3.3 The TED spread 224Part Three Inflation-Linked DebtChapter 23 Inflation-Indexed Bonds 22723.1 Introduction 22723.1.1 Cashflows of inflation-linked bonds 23023.1.2 Quotation of index-linked bonds 23223.2 Rebalancing, rebasing and revision of CPI indices 23223.3 Inflation seasonality 23423.4 Price formation in inflation-linked markets 23823.5 Return measures of inflation-linked bonds 24023.6 Breakeven inflation 24123.7 Carry on inflation-indexed bonds 24423.8 Comprehensive inflation modelling 24523.9 Inflation models and expectations 249Part Four Defaultable ClaimsChapter 24 Credit Risk 25524.1 Default, insolvency, and bankruptcy 25524.2 Seniority and subordination 25624.2.1 Time subordination and acceleration 25624.2.2 Contractual subordination 25624.2.3 Statutory subordination 25724.2.4 Joint liabilities and credit support 25824.2.5 Sovereign debt 25924.3 The default process 25924.3.1 Collective action clauses 26124.3.2 Debt exchanges and consent solicitations 26224.3.3 Managed defaults 26324.3.4 Wind-downs 26324.4 Credit ratings 26424.4.1 Rating migration 26624.4.2 Alternativ rating approaches 270Chapter 25 Covered Bonds 27225.1 Statutory covered bonds 27725.2 Danish covered bonds 27925.3 Structured covered bonds 28125.4 Covered bond credit risk analysis 282Chapter 26 Asset-Backed Securities 28426.1 The ABS issuance process 28526.2 Default risk of ABS 28626.3 Maturity of ABS 287Chapter 27 Residential Mortgage-Backed Securities 28927.1 Residential mortgage prepayments 29027.2 Prepayment modelling 292Part Five DerivativesChapter 28 Bond Futures 30128.1 Introduction 30128.2 Futures trading patterns 30328.2.1 Open interest and trading volume 30328.2.2 CFTC data for US futures contracts 30728.3 Valuation of physically delivered bond futures 31028.3.1 Basis and implied repo rate 31028.3.2 Conversion factors and the notional coupon 31228.3.3 The cash-and-carry arbitrage 31428.3.4 The quality option 31528.3.5 Hedging with futures 31628.4 Futures rolls 32128.4.1 Roll ratios 32428.4.2 Advanced futures delivery models 32528.5 Delivery windows 32628.6 Interaction between futures and bonds 32728.7 Futures squeezes 32928.8 Cash-settled futures 33128.8.1 Exchange-for-physical transactions 33228.9 New bond issues 332Chapter 29 Swaps 33429.1 Introduction 33429.2 Plain vanilla swaps 33629.3 Trade compression and re-couponing 338Part Six Standard Trading StrategiesChapter 30 Trading Principles 34330.1 Definitions 34330.2 Trade identification 34530.3 Trade portfolios 346Chapter 31 Curve Trading 34731.1 Simple curve trades 35031.1.1 Outright Trades 35031.1.2 Steepeners and Flatteners 35031.1.3 Butterflies 35331.1.4 Condors 35431.2 Intrinsic curve movements 35431.2.1 Alternative specifications 360Chapter 32 Bond Trading 36232.1 Bond relative value 36232.2 Relative value strategies 36332.2.1 Spread widener/tightener 36332.2.2 Basis trade 36432.2.3 Bond spread 36532.2.4 Bond spread with curve hedge 36532.2.5 Alternative strategies 366Part Seven Risk ManagementChapter 33 Principal Component Analysis 37133.1 PCA as generalised regression 37333.2 Measuring data complexity with PCA 375Chapter 34 Bond Index Mechanics 37834.1 Bond index principles 37834.2 Index rebalancing 380Chapter 35 Portfolio Risk Management 38135.1 Risk-neutral portfolios 38135.2 Index tracking 38335.2.1 Factor analysis and spanning sets 38535.2.2 Friction effects 387Chapter 36 Hedging 38936.1 Introduction 38936.2 Duration-neutral hedges 39036.3 Regression hedges 39136.4 Yield curve model hedges 392Chapter 37 Mean-Variance Optimisation 395Chapter 38 Portfolio Rebalancing 40338.1 Passive and semi-passive strategies 40438.1.1 No reallocation 40438.1.2 Passive management 40438.1.3 Index replication 40538.1.4 Constant asset allocation 40538.1.5 Trend-Following 40638.1.6 Mean reversion 40638.2 Numerical examples 407Part Eight ReferencesChapter 39 Selected Global Bond Markets 41339.1 Euro area 41339.1.1 Austria 41439.1.2 Belgium 41539.1.3 Finland 41639.1.4 France 41639.1.5 Germany 41839.1.6 Greece 42139.1.7 Ireland 42239.1.8 Italy 42339.1.9 The Netherlands 42439.1.10 Portugal 42539.1.11 Spain 42639.2 Iceland 42739.3 Japan 42839.4 Sweden 43039.5 United Kingdom 43139.6 United States of America 433Bibliography 435Index 439