What You Need to Know About Fixed Income Trading


Fixed-income trading involves buying and selling debt instruments like corporate bonds, credit default swaps, and government securities. A strong mathematics foundation is essential.

Understanding market trends — specifically interest rate fluctuations and credit spreads — to spot trading opportunities is vital, yet as data production and analysis become ever faster, sophisticated analyses must supplement trader intuition.

Credit Risk

Credit risk in fixed-income trading refers to the possibility that an issuer of a bond may fail to honor its agreement to return investors their principal and interest payments as promised. While corporate bonds tend to carry this risk more heavily than other forms of fixed-income investment products such as government or structured instruments like CDOs or mortgage-backed securities, collateralized debt obligations or mortgage-backed securities could also present this threat, or it can even come from changes in assets backing such securities.

Bond creditworthiness can be an investment risk, but it’s equally important to recognize the other associated risks with bonds as an instrument. For example, bond prices can be affected by inflation, which reduces future cash flows; additionally, the liquidity of a bond may be altered by market intervention by central banks, foreign exchange flows, or competitors offering comparable assets affecting its price.

An effective fixed-income trader must understand these instruments’ financial trends, including interest rate movements, credit spreads, and valuation. Furthermore, they must comprehend how these instruments correlate to each other and understand the economy affects their performance – this will enable them to develop strategies that align with client and firm goals by changing market conditions.

Debt and equity investments are two primary forms of fixed-income investments. Debt investments backed by cash flows generated from assets like real estate or consumer loans typically fall under government or private institution oversight and tend to be low-risk. Conversely, equity investments do not rely on cash flow backing. Still, they may experience fluctuating market conditions or events out of an investor’s control and be subject to value fluctuation risks that could impact their returns significantly.

Active managers of fixed-income portfolios employ fundamental and quantitative research methods to optimize their portfolios while simultaneously lowering volatility and credit risk exposure. Active managers have proven more successful at producing a superior return than passive index replication in markets with low volatility or interest rates.


Liquidity in fixed-income trading refers to the amount of securities that can be traded at current prices and is a critical aspect of market functioning, without which markets could become too inefficient or risky for all participants. Liquidity also depends on product and market characteristics. Therefore, different needs have adopted differing standards for managing it – this has given rise to tailored trading protocols, data, and workflows explicitly tailored toward each bond market’s unique structure.

Fixed income trading differs significantly from equity market trading in that transactions typically take place over-the-counter rather than exchanges, often being assisted by dealers buying and selling bonds on behalf of clients or themselves – often through dealers – meaning more opportunities for liquidity squeezes due to structures making securities less liquid such as corporate “junk” bonds being hard to unload quickly, leading to further liquidity constraints.

Early March saw the Federal Reserve respond to bond market strain by creating two facilities designed to address liquidity: Primary Dealer Credit Facility (PDCF) and Secondary Market Corporate Credit Facility (SMCCF). Although these measures did help improve funding conditions for dealers, their effectiveness still left transaction costs significantly higher than before the Fed intervened in February.

Recent years have seen an influx of institutional investors entering the fixed-income market, helping to ease some of its strain and prompt dealers to expand their electronic trading platforms, leading to an increase in customer-to-customer trades, though still representing only a relatively minor portion of overall bond trading volumes.

To become a successful fixed-income trader, one needs a comprehensive education in finance and business. Pursuing a bachelor’s degree with an emphasis in finance can equip an aspirant with essential skills for the job; certification as either Chartered Financial Analyst (CFA) or Certified Accounting Professional Full Form (CPA) increases chances of landing employment as a fixed-income trader.


Valuing fixed-income securities is a vital part of the trading process and must be undertaken carefully for its health. Though complex in its approach, the valuation of fixed-income investments involves many different considerations that affect the price – the issuer’s creditworthiness, market expectations, and economic trends all play into the pricing of bonds; prices also fluctuate with changes to interest rates.

Fixed-income trading instruments, or debt instruments issued by companies and governments to raise money from investors, promise regular interest or dividend payments and full principal repayment at maturity – helping diversify investment portfolios while decreasing risks while expanding profit potential.

Investors and traders of fixed-income securities should understand all available types, such as individual bonds, bond funds, ETFs, and CDs. Furthermore, they must become acquainted with various valuation methodologies to determine a security’s worth, including market discount rates, forward curves, or pricing models.

Valuing a bond involves comparing its present value of all future cash flows against its original principal amount. The principal amount may then be discounted into the current time using LIBOR or U.S./German government bond yields with similar duration, giving its gross redemption yield, which can then be multiplied by duration to obtain its market price.

Interest rate and credit default risks are two key concerns when investing in fixed-income securities, though generally lower for individual bonds than equity markets. Rising interest rates can cause prices of individual bonds to drop, while an issuer defaulting could prevent it from meeting its interest and principal payments obligations.

Inflation can create havoc for bondholders, reducing the purchasing power of interest and principal payments, rendering Fixed Income securities less appealing to investors seeking cash-flow certainties, such as pension funds or retirees.


“Death and taxes” is an old saying, but taxes can also be certainties in investing. Uncle Sam expects his fair share from you as an investor; therefore, you must understand how different fixed-income investments are taxed.

Typically, any security held for more than a year and sold with gains taxed at the lower long-term capital gains rates is taxed at long-term capital gains rates; this taxation rate applies to ordinary income rates that most investors pay. However, many types of bonds held for less than one year may result in short-term capital losses that can incur maximum federal income tax rates of 20% on sale.

Taxable investors rely heavily on tax-exempt municipal bonds and other tax-advantaged bonds as part of their fixed-income investments. But recent municipal bankruptcies and shifts in their yield profile present opportunities to use alternative strategies that offer higher after-tax returns.

Northland Securities provides an experienced team of fixed-income traders who boast extensive investor networks and can access a robust trading platform. Our traders offer value-add services such as analysis, insight, strategy, and education.

Northland Securities Fixed Income Trading Department boasts 180+ years of collective experience, offering clients access to an expansive network of investment opportunities. Thanks to a dedicated marketing and trading support staff, we can identify the highest value opportunities for our clients – giving them access to abundant liquidity and possibility.

Existing rules governing fixed-income markets may be effective. Still, they must adapt to market growth to maintain more liquid and transparent markets without incurring unnecessary costs for fixed-income investors. New regulations should consider mark-to-market accounting on trading activity and how changing interest rates might alter the price and yield of any given security. Traders must keep detailed records to distinguish between securities held as investments versus those owned for trading business purposes.