Investment grade corporate credit
Eternally grouchy, but they have good reasons for being so. A universe of primarily plain vanilla bonds that trade as a spread product to treasuries due to the added default and liquidity risk. Trading volumes and liquidity measures are much lower, while financing costs are higher. The idiosyncratic credit risk make the bonds difficult to hedge, though the rise of exchange traded credit funds has made it easier to balance broad market-based credit risk. Wedged firmly between the debt and equity underwriting groups at big shops, the internal politics can be tricky. Practitioners are expected to know as much detail about the companies they cover as equity analysts, but are discouraged from disagreeing with their typical rah rah outlook. The infantry troops of fixed income - tough, hard working, nose to the grindstone, smart enough not to lift their heads when the bullets start flying. Can exhibit inspiring cohesion when cornered. Many years ago, during a particularly brutal comp and RIF season, a group of credit traders are rumored to have shown up to a 7am morning meeting already in the bag. Then proceeded to burp and pass gas throughout the meeting, while asking a few pointed but not impertinent questions. Absolute legends.
High yield corporate credit
The smartest group on the floor next to the vol desk, leaning more towards law and accounting than quant. The market for high yield, or junk, rated debt is smaller, less liquid, significantly more complex and volatile than that of investment grade. Deep knowledge of bankruptcy and securities law, along with an exhaustive approach to analyzing financial statements, is standard. Often attracts lawyers and very sharp MBAs who can independently value balance sheet assets, and have niche expertise in the areas they cover, such as companies with biotech patents or mineral rights. Interest rate risk is trivial compared to the credit risk, which to the best of my limited knowledge is fairly unhedgeable. Similar to vol desks, books can blow up overnight, so steady nerves and deep appetites for risk are hallmarks. If they were slicker and more extroverted they would probably end up in investment banking or private equity. Intellectually sophisticated and fair minded, they are possibly the most interesting people to talk to over drinks. But don't cross them. They and their clients will bring a gun to a knife fight.
Structured products
Beyond the $9 trillion agency MBS market, with trading volume of nearly $300 billion per day, lies the other structured product securities markets. These markets are smaller and relatively less, to extremely less, liquid and transparent. Understanding the asset class and its economic drivers, the characteristics of the underlying loans, and the interest rate and credit dynamics of the wide variety of securities that are structured from pools of such loans is hard work. A lot of specialized work that requires deep expertise in the business that produces the loans, e.g. subprime autos or commercial real estate; the financing and underwriting of the loans into securitization; and the structuring of cashflows from the pool into the various securities of the deal.
For better and for worse, the temperament and personality characteristics of the various structured product desks tends to mimic those of people in the loan origination business. The upside is that the securities and the businesses they support can be complex and fascinating. The downside is that, although lumped together, they tend to operate within silos more so than other areas of fixed income because each market and product is so highly specialized. Pro tip: most structured products desks are bored silly listening to the other desks' market commentary in the morning meeting. The geeking out and jargon will make your eyes glaze over.
Asset-backed securities (ABS)
If you cover or trade asset-backed securities based on autos, credit cards or student loans, it helps to have an interest in consumer finance and perhaps personal bankruptcy law. Most ABS matures in under 3 years, though some can go out to 5 years, so secondary trading tends to be very light and risk management is getting the deal out the door. The big swingers are on desks with large underwriting businesses, typically at bulge bracket financial institutions with broker dealers and commercial banks, though some smaller banks specialize in particular market segments and those desks can be outsized drivers of that business. People who work on ABS desks can glance at you, ask where you work, then rattle off a surprisingly prescient guess of your household income, credit score and the likelihood you will default on a loan. Esoteric ABS desks know weird stuff like what people keep in those self-storage sheds outside of Poughkeepsie and how much money different medical practices make.
Commercial mortgage-backed securities (CMBS)
Well, tra la la. Here we are. There are two flavors of CMBS:
- Agency CMBS, which is exclusively multifamily commercial real estate loans, guaranteed by one of the government agencies (Fannie Mae, Freddie Mac or Ginnie Mae). The better and chummier your relationship with the government agencies, the more deals you lead, more trading flow you can generate and clients you can bring to the table. Despite being closer to investment banking than is often comfortable, it's filled with people who are great team leaders, geeky enough to structure bespoke bonds and personable enough to sell them, and can navigate political relationships with the GSEs, the Fed and recently the FDIC. That is no small feat. Good drinking buddies all around.
- The other flavor is non-agency CMBS and CRE CLOs, which are securities comprised of pools of stabilized and transitional commercial real estate loans, respectively, of any property type, e.g. multifamily, office, hospitality, industrial, etc. To lead CMBS deals you need a pipeline of loans and/or to provide financing to specialty lenders as loans are being pooled for a deal. If you don't lead at least the occasional deal, you are trading from the sidelines. Commercial real estate and the desks that traffic in it tend to be dominated by big deals and bigger egos. Donald Trump is not an outlier. The spectrum runs from charismatic, iconoclastic thinkers with high tolerance for risk to insecure dictators who can't abide anyone speaking out of turn, much less dissent. Watch your back.
Closing remarks
I've been at a lot of sell side shops and worked on a variety of fixed income desks. A few things stand out to me that might be useful for people entering the business or considering a switch.
- There is a big difference between broker dealers that are primary dealers for the Federal Reserve and everyone else. It has the biggest impact in treasuries, repo and agency MBS, but that flow and knowledge difference trickles down through other products as well. There are some clients, particularly some large international clients, who will not trade with a broker dealer that is not a primary dealer for the Fed.
- Likewise, there is a considerable difference between shops that finance loans and are lead managers of deals or securitizations in an asset class, and those that are solely in the selling group on deals or trade strictly in the secondary market. More knowledge, more experience, greater ability and mandate to warehouse risk. Smaller desks may work harder for some client business and can be more discrete.
