Never heard of bond ladders? Well neither had I until a few months back. I was running some tests on a sample bond portfolio and discovered a seeming paradox: A portfolio that is long bonds may actually benefit from a sell off! The explanation is that you benefit when you reinvest the coupons that your … Continue reading Bond ladders
Armed with the Hardy Decomposition for option prices, it now becomes much easier to understand why the smile exists. To be clear, options trader might use the smile to manage supply & demand, but here we discuss the mathematical basis for smile - which is important if you want to understand how to generate smile … Continue reading Smile, it’s Volga!
This short post is primarily to give links to three excellent articles on macro economics by Ray Dalio, founder of Bridgewater. The first, a 'template for understanding' how economies work, is better than anything I have ever seen in introductory books on economics. The other two articles take a closer look at the dynamics of debt and … Continue reading The current crisis in historical perspective
I came across an interesting presentation given by one of the senior members of PIMCO UK, a chap called Mike Amey. Click here to see it (a PDF). What I especially like about this presentation is that it covers a lot of the main topics that I hear investors discussing at the moment, ranging from … Continue reading Fixed-income investment strategies in the age of the New Normal
I recently wrote quite a long post on swap spreads (click here to see that post), covering some general intuition about swap spreads: what does a swap spread represent, why does it move, when does it move, which direction does it go, etc. My blog stats show that a lot of people have read it, so … Continue reading A quant trading model for swap spreads
One of the most basic elements of any job on the trading floor is pricing. This post gives you two important tips that can help you to: reduce the probability of making a pricing mistake, talk to your trader in clearer terms, check that your pricing is reasonable, and generally get a better intuition for … Continue reading Two top tips for pricing
In this post I give a short, but I think rather usefully direct reason for why the yield curve should slope upwards. All it requires is for you to put yourself in the shoes of an investor that has to lock up their money in a bond for a fixed amount of time (and a … Continue reading Why does the yield curve slope upwards?
Well the title is a bit of an overstatement! This post is actually just a short note with a link to a document which covers the concept of specialness in the repo market, and which is actually a good description of the repo market as a whole. Such things are hard to find, you know. … Continue reading Everything you wanted to know about Repo but were afraid to ask
Positive carry can be an obsession for fixed-income investors. For a simple explanation of carry for a bond position have a look at this well-written post: click here.
The N-year swap spread is defined as: N-yr swap spread := N-yr swap rate - N-yr government bond yield. Since most quants spend much less time on the bond market than on the swaps market, they often don't come to appreciate the central importance of the swap spread. Here is an unordered list of why … Continue reading Facts, rules of thumb, and intuition for swap spreads