Fixed-Income Securities Market

When the individual investor wants to reassure himself, that he/she will get a return on investment, there is always the choice for fixed-income security.  Bonds, are debt instruments sold by governments, companies, and financial institutions in order to raise capital.  They normally carry a fixed-rate for interest known as the coupon, have a fixed redemption value (or par value) and are repaid after a fixed-period.

The interesting spin to this already seemingly safe and rather boring investment, is the diversity set on the savvy fixed-income trader.  As a start-up manager, I have come across venues to beat the market on average wielding fixed-income.  For instance, I want to invest $50,000 dollars into the secondary markets, but I also want to make sure I do not lose out on my principle investment.  Using a simplified fixed-income timetable, I the investor, can project return on investment ten and even thirty years into the future.  I, am then able to gain a firmer grasp on the fundamental direction of the overall economy, and whether companies I wanted to bet my money on stock first are paying down their fiduciary responsibility.  For the person with a $50,000 dollar capital start-up on the bond markets, the possibilities are endless.

One person may feel as, the economy is in for a downturn and may decide within the fixed-income markets to get long five or even ten year treasury-securities.  This person may then justify his or her position as stating: "There is an inverse relationship between interest rates and securities prices.".  On the other hand, optimists behind the fixed-income markets may start selling their stakes in treasury or bond and want to purchase the same fixed-securities at a discount.  Allowing the bullish alternative, demand for short-term securities rises and rates are expected to be valued higher at the discount.  Atop, optimists feel that capturing fixed-income at a discount will allow time for the economy to rise beyond expectation, and acquire the maturity-to-date on the security.

Certain market participants are rather complex individuals, nonetheless.  They utilize "tunnel vision" in their investment theses and attempt to ride the yield curve.  There are ways for the investor to gain traction in the fixed-income markets by going short on Treasury Inflation Protected Securities.  While interest rates tend to rise, a person who is holding fixed-income at 3% may see the economy at a 5.5% interest rate.  This person, holding the Treasury Inflation Protected Securities at 3%, may want to get short the TIPS in anticipation of interest rates hitting 6%.  Nevertheless, this person is expecting rates to go up while the price of long-term securities comes down.  It can also be categorized as "borrowing low" and "lending high.".  The investor, always wants to try and be at both places at the same time.

Credit-spreads tell of the additional net yield an investor can earn from a security with more credit-risk relative to one with less credit risk.  Sell long-treasuries at 6%, when hedged against the economy as it takes the slide, and watch the premium just roll in...