Fixed Income

The curve — 3 months to 30 years in one line — is the bond market's worldview, and its shape is a forecast.

• Normal (upward): paid for time and inflation risk. Flat: tightening is biting. Inverted: cuts expected — preceded every US recession in 50 years, with famous head-fakes.
• Riding the curve: buy a 5-year, sell it as a 4-year — extra return when the curve is steep.
• Curve trades (steepeners, flatteners, butterflies) bet on shape without betting on level.
• Extract the hidden number: the forward-rate calculator on the rates page reads what any two curve points imply for the gap between them.

From AAA to CCC, yield climbs convexly — because default risk compounds down the scale.

• 10-year cumulative default odds: single-A well under 2%; single-B past 20%.
• The BBB/BB cliff: many mandates can only hold investment grade — downgrades to "fallen angel" trigger forced selling regardless of anyone's view.
• BBB is the biggest bucket because issuers manage to the boundary.
• Fallen angels have historically outperformed same-rated original-issue HY — forced sellers create the entry price.

Duration compresses a bond's whole cash-flow schedule into one number: its rate sensitivity. Convexity is the curvature behind it.

• Rule of thumb: price change ≈ −duration × yield change. Duration 8, +1% yields → −8%.
• Zeros: duration = maturity; high coupons shorten it; low yields lengthen it — the 2010s built maximum rate-sensitivity, then met 2022.
• Convexity is the holder's friend: losses decelerate, gains accelerate.
• Negative convexity is not: callables and MBS bend the wrong way — upside capped exactly in rallies.
• Know your portfolio's duration — it's your rate bet, intended or not.

The quiet giant has its own drama, roughly one act per decade:

• 1970s — Ginnie Mae pass-throughs invent securitisation; inflation destroys bond returns ("certificates of confiscation").
• 1979–81 — Volcker takes short rates toward 20%; the great bond bull market begins from the wreckage.
• 1980s — Milken builds the original-issue high-yield market; the LBO era gets its fuel.
• 1994 — the "bond massacre": a 3% Fed surprise, Orange County goes bankrupt on leveraged rate bets.
• 1997 — TIPS arrive: US real yields become directly tradable.
• 2008 — securitisation's annus horribilis; the machinery survives, chastened (see MBS/ABS/CDO pages).
• 2012–20 — negative yields on trillions of European and Japanese debt: the zero-lower-bound decade.
• 2022 — the worst year in modern bond history (−13% aggregate): duration risk stops being theoretical.
• 2023 — Credit Suisse AT1 wipeout: documentation becomes a headline risk.

• Issuers: treasuries and debt management offices (US Treasury, the German Finanzagentur, the UK DMO) set the sovereign calendar; corporates issue opportunistically through bank syndicates.
• Primary dealers: the banks obliged to bid at government auctions and make secondary markets — the plumbing between issuer and investor.
• Trading platforms: MarketAxess, Tradeweb and Bloomberg carry most electronic credit and rates volume; the rest is voice and chat, which is why bonds still trade "by appointment".
• Index providers: Bloomberg (the Aggregate family), ICE BofA and iBoxx define the benchmarks trillions are managed against — inclusion rules are a price factor.
• Rating agencies: S&P, Moody's and Fitch, whose boundaries (especially investment grade versus high yield) trigger mechanical buying and selling.
• Central banks: not referees but the largest holders in many markets — QE and QT are supply-and-demand events for this asset class.

The habit that separates bond investors from bond tourists: always state whether a yield is nominal or real, and whether a spread is over governments or swaps. Half of all bond confusion is two people using the same number to mean different things.

1. Who is the borrower, and where do I rank? Secured, senior, subordinated or hybrid — the answer sets your recovery, not your rating.
2. Nominal or real? Compare the yield with the breakeven inflation rate before deciding which bond you actually want.
3. What is my duration bet? Duration times your position is a rate view whether or not you meant to have one.
4. Where is the optionality? Callable, puttable or prepayable paper has negative convexity — the borrower's option, paid for by you.
5. Does the spread cover expected loss? Default probability times one minus recovery, subtracted before you call anything cheap.
6. How does it trade? Issue size, bid-ask and whether anyone quotes it in size — bonds are far less liquid than their yields suggest.

• Yield-to-maturity quoted on a callable bond — the honest number is yield-to-worst, and the gap can be years of return.
• Coupon mistaken for yield: a 6% coupon bought at 112 is not a 6% investment.
• Reaching down the capital structure for yield without repricing seniority — the extra spread is compensation, not a gift.
• "Safe" long-dated government bonds: default risk near zero, mark-to-market risk enormous. 2022 settled that argument.
• Diversification inside one issuer — twelve bonds from one borrower is one credit decision.
• Minimum denominations of €100,000 are a signal: the issuer deliberately excluded retail, often because the structure is complex.