Bond Trading Desks

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SlowMovingInvestor
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Bond Trading Desks

Post by SlowMovingInvestor » Tue Jan 14, 2020 4:42 pm

I was reading a few news items about how JPM Chase's bond trading desk had a great year (and Citi's apparently did too) after a lousy 2018.

The question I have is this -- how do bond trading desks make money ? Is it one of these methods ?

1) Through selling new bonds issued by clients, mostly corporates, but maybe also munis, agencies, and even foreign countries ?
2) Making markets in bonds -- especially for bonds for which they are the primary dealers ?
3) Markups on bonds they buy (or sell) for customers ?
4) Making directional bets on interest rates, or on corporate vs Treasuries etc. etc. ?
5) Packaging bonds into structured securities and reselling ?

I know this is not strictly actionable, but I do wonder what (if any) impact this trading has on bond index funds/ETFs. Do they lose some market gains to trading desks (especially in bonds that aren't heavily traded) ?

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The Man with the Axe
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Re: Bond Trading Desks

Post by The Man with the Axe » Tue Jan 14, 2020 7:13 pm

For a detailed answer to your question, you should read Liar’s Poker by Michael Lewis. If you enjoy this website, you will probably really enjoy that book.

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SlowMovingInvestor
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Re: Bond Trading Desks

Post by SlowMovingInvestor » Tue Jan 14, 2020 8:52 pm

The Man with the Axe wrote:
Tue Jan 14, 2020 7:13 pm
For a detailed answer to your question, you should read Liar’s Poker by Michael Lewis. If you enjoy this website, you will probably really enjoy that book.
I have read it (as well as most of his other books) but it's set in the 80s, so likely very dated.

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Vegomatic
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Re: Bond Trading Desks

Post by Vegomatic » Tue Jan 14, 2020 11:15 pm

How do bond trading desks make money?

Well, in some cases - see 1 to 2, below - the same way that the Astros win the World Series.

  1. BLOOMBERG: ‘Greed and Lies on Wall Street’ Is Opening Argument in Bond-Marking Trial
    https://www.bloomberg.com/news/articles ... king-trial
  2. CNBC: EU charges eight banks over euro govt bond trading cartel
    https://www.cnbc.com/2019/01/31/eu-char ... artel.html

alex_686
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Re: Bond Trading Desks

Post by alex_686 » Tue Jan 14, 2020 11:20 pm

Not 1 & 5. Those are handed in other areas.

2 - 4 are more in line.

Note, most bond desks use leverage. Borrow at low rates with short and liquid bonds, go long with high rates with long and illiquid bonds. Banks do the same. So even small returns can be leveraged up.

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patrick013
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Re: Bond Trading Desks

Post by patrick013 » Wed Jan 15, 2020 10:16 am

Brokers with a "bond inventory" can have better prices than the top 5 brokers regarding bonds in the secondary market. The top 5 brokers usually underwrite and sell new large issues and price those to sell in a short time window. So their new issue yields are usually higher than their yields on similar secondary market bonds. Fees built into the price are higher too. A bond desk gets their commission for secondary bonds thru the bid-ask spread. Fees and commissions are a large part of revenues. Chase and Citi have trading gains/losses but I would expect it to be a smaller part of income. Vanguard has to compete with the market in buying. Buying bonds at reasonable prices, large and liquid new issues, etc..
age in bonds, buy-and-hold, 10 year business cycle

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jhfenton
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Re: Bond Trading Desks

Post by jhfenton » Wed Jan 15, 2020 10:26 am

Vegomatic wrote:
Tue Jan 14, 2020 11:15 pm
Well, in some cases - see 1 to 2, below - the same way that the Astros win the World Series.
This kind of comment could be more divisive than politics. :mrgreen:

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