Modern Bond Trading Explained

𝐌𝐞𝐞𝐭𝐢𝐧𝐠 𝐨𝐟 𝐓𝐡𝐞 𝐌𝐢𝐧𝐝𝐬: the bond trading landscape has never been more complex – or more connected. This map breaks it down. How is OpenYield different from an EMS? Who are the different types of dealers? What data powers the ecosystem? I put this together to help clarify not just where we sit, but how all the pieces of electronic fixed income trading fit together. Markets have moved from voice to electronic, replacing the telephone with an entirely new market structure. Execution now depends on multiple layers—connectivity, execution, and data —reshaping how fixed income trades. At its core, the complexity results in a trade between two parties and a ledger update. The map is dynamic—many of these logos didn’t exist 10 years ago. While it’s hard to predict how the landscape will evolve in the years to come, one thing is clear: greater connectivity, competition, and data will drive better outcomes for the end investors.

Ever heard the saying "The bond market is smarter than the stock market"? It's not just a cliche, it's kinda true. To learn why, keep reading. ➡️ Stock traders think in price. Bond traders think in yield. That's already more complicated. You buy a stock at $50, and if it goes to $60, you profit. You buy a bond and start calculating YTM, adjusting for duration, spread, credit quality...and whether the Fed is lying to you. Stock trading is grade 2 arithmetic. Bond trading is applied mathematics. Stocks move linearly. Bonds have convexity. Stock goes up 10%, you cheer. Bond yield drops 1% and you need calculus to understand why the bond price moved the way it did. When yields drop, bond prices rise...but not linearly. A 1% drop from 5% to 4% increases the bond price more than a drop from 6% to 5% (this is why bond traders need to know how to calculate DV01, the dollar value of a basis point). Convexity makes this asymmetry measurable and tradeable but it's a big part of why bonds aren't "simple" instruments - their sensitivity to rates accelerates in non-linear ways. Equity traders say, "I bought 1,000 $COIN at $360.25, Iezzzgooo!" Bond traders say, "I've got $2.4m in DV01 risk at the 10y point and need to neutralise my curve exposure with a 5s10s steepener." The idea that bonds are the underlying, yet exhibit more mathematically complex behaviour than the instruments derived from them (like options) is a delicious paradox. ➡️ Delta vs Duration Delta in options feels similar to duration: both are first-derivative sensitivities...but delta is about stock price moves, while duration's tied to changes in yield. But let's dig a little deeper... Gamma, which measures the rate of change of delta, is roughly symmetrical (for European options). Convexity - which measures how duration changes as yields change - is asymmetrical. Which market’s tougher to master: stocks or bonds? Drop your take below! 👇

How to Build a Basis Trade: Mechanics, Leverage, and Risks Author: Alessio Gioia   Introduction A basis trade in the context of U.S. Treasurys involves taking advantage of the price discrepancy between cash Treasury securities and Treasury futures. This trade is generally considered low-risk when carefully constructed and well-managed, as the futures position can be settled with the delivery of the physical bond at expiry. A basis trade can be structured in different ways, but this article focuses on the long basis trade, which combines a long position in cash Treasurys with a short position in Treasury futures. In this setup, the long cash Treasury position is funded through the repo market, utilizing leverage to magnify returns. The primary goal of a basis trade is to profit from the narrowing spread between the cash bond and its futures counterpart. While this strategy can offer substantial returns with minimal duration risk, it is highly sensitive to market volatility and liquidity conditions.   Mechanics of a Long Basis Trade Long Cash Treasury Position: This involves purchasing a Treasury bond or note in the cash market. The cash bond is expected to outperform its futures counterpart as the futures contract approaches settlement. Short Treasury Futures Position: The short position in Treasury futures offsets the long cash bond position. Futures prices can fluctuate based on market factors, but the convergence with the cash bond at settlement reduces the risk associated with duration exposure. To enhance the profitability of the long cash position, investors typically use repo funding to finance the Treasury purchase. The process involves borrowing cash to buy the Treasury bond and then pledging the bond as collateral for the loan. This funding is conducted through the repo market, where investors can borrow funds at the repo rate, which is generally lower than the return on the bond. The steps to execute the trade are: Borrow cash from a bank or dealer to fund the purchase of the Treasury bond. Purchase the Treasury bond using the borrowed cash. Pledge the Treasury bond as collateral to secure the loan from the lender. In most cases, these steps occur simultaneously to minimize transaction risk and ensure smooth execution. The dealer often acts as both the lender and the seller of the Treasury bond, allowing for efficient completion of the trade. In the repo market, the amount borrowed is slightly less than the full value of the bond, with the haircut representing the investor's own capital contribution. For highly liquid assets like U.S. Treasurys, the haircut typically ranges from 0-2%. This small margin allows investors to use high leverage, which can significantly amplify returns when the trade is successful.