Markets & Liquidity –
a Fixed Income Trader’s Perspective
Ryan A. Bilsky, CTP
Assistant Vice President
Fixed Income Trader
KeyBanc Capital Markets
October 1, 2015
Disclosure
KeyBanc Capital Markets is a trade name under which corporate and investment banking products and services of KeyCorp and its subsidiaries,
KeyBanc Capital Markets Inc., Member NYSE/FINRA/SIPC, and KeyBank National Association (“KeyBank N.A.”), are marketed. Securities
products and services are offered by KeyBanc Capital Markets Inc. and by its licensed securities representatives. Banking products and services
are offered by KeyBank N.A.
A number of our corporate and institutional team members are employed by both KeyBanc Capital Markets Inc. and KeyBank N.A. These “dual
employees” are licensed securities representatives of KeyBanc Capital Markets Inc., and they are there to better serve your needs, by making
available both securities and banking products and services.
Further, in connection with our effort to deliver a comprehensive array of banking and securities products and services to you in a seamless manner,
from time to time KeyBank N.A. and KeyBanc Capital Markets Inc. will share with each other certain non-public information that you provide to us.
Of course, as always, this information will not be shared or otherwise disclosed outside of the KeyCorp organization without your express
permission. Please also be assured that, as with other banks and broker-dealers, KeyBank N.A. and KeyBanc Capital Markets Inc. adhere to
established internal procedures to safeguard your corporate information from areas within our organization that trade in or advise clients with
respect to the purchase and sale of securities.
KEYBANC CAPITAL MARKETS INC. IS NOT A BANK OR TRUST COMPANY AND IT DOES NOT ACCEPT DEPOSITS. THE OBLIGATIONS
OF KEYBANC CAPITAL MARKETS INC. ARE NOT OBLIGATIONS OF KEYBANK N.A. OR ANY OF ITS AFFILIATE BANKS, AND NONE OF
KEYCORP’S BANKS ARE RESPONSIBLE FOR, OR GUARANTEE, THE SECURITIES OR SECURITIES-RELATED PRODUCTS OR
SERVICES SOLD, OFFERED OR RECOMMENDED BY KEYBANC CAPITAL MARKETS INC. OR ITS EMPLOYEES. SECURITIES AND
OTHER INVESTMENT PRODUCTS SOLD, OFFERED OR RECOMMENDED BY KEYBANC CAPITAL MARKETS INC., IF ANY, ARE NOT
BANK DEPOSITS OR OBLIGATIONS AND ARE NOT INSURED BY THE FDIC.
This information is provided in confidentiality and is not to be shared by the principals with third parties.
2
Agenda

What market are we talking about?

How does a market function?

How does a trading desk operate?

Liquidity in Treasuries and Agencies

“How does this effect me?”
3
1
Fun Facts

The bond market is massive:
–
As of the end Q1 2015, there was a total $39.2 trillion (T) of outstanding debt according to the Securities
Industry and Financial Markets Association (SIFMA).
•
This includes the following types of bonds:
•
•
•
•
•
•
•
Municipal - $3.694T
Treasury - $12.63T
Mortgage Related - $8.69T
Corporate Debt - $7.97T
Federal Agency - $1.98T
Money Markets - $2.88T
Asset-Backed - $1.36T

Outstanding Treasury debt is at an all time high.

Outstanding Federal Agency debt is decreasing.
–
–
In 2007, before the financial crisis, Treasury debt was at $4.5T.
Most recent high was 2008 at $3.2T, has decreased each year since then.
4
Treasuries, Agencies & Money Market Instruments

Treasuries
- Bills
- Floating-rate
- Notes/Bonds
- On the Run
- Off the Run

Agencies
- Discount notes
- Floating-rate
- Coupons (Benchmark, TAP)

Money Market Instruments (<13mo)
- Discount notes (Disco)
- Commercial Paper (CP)
- Bills
- Certificates of Deposit
5
What Does The Market Look Like?
6
2
What Makes A Market?

Bid (buyer)

Ask (seller)
Example:
On-the-run 10yr US Treasury – T 2.125 05/15/25
Current Yield: 2.16%
Bid: 99-21 Ask: 99-21+
7
Spreads…

Lets start with a U.S. Treasury yield curve…
Example: On-the-run 5yr Agency Benchmark
FNMA 1.50 6/22/20, Bid: 14 Ask: 13.5
~ 1.635% (1.50+13.5)
8
Market Participants

Broker/Dealers
Broker – Acting on behalf of a customer with an order to execute a transaction
Dealer – Executing transactions for its own account

Primary Dealers
–


A primary dealer is a firm that buys securities directly from the US Treasury with the intention of reselling
them to others, therefore, making a market in US Treasuries.
Other participants
–
–
–
Issuers (Governments, Companies, Agencies, Financial Institutions)
Retail/Institutional buyers/Qualified Institutional Buyers (QIB)/Hedge Funds (End-Accounts)
Syndicate/Selling Group Member (Reverse Inquiries)
Buy side vs. Sell side
9
3
Primary Dealers

Primary dealers serve as trading
counterparties of the New York Fed in its
implementation of monetary policy. This
role includes the obligations to: (i)
participate consistently in open market
operations to carry out U.S. monetary
policy pursuant to the direction of the
Federal Open Market Committee (FOMC);
and (ii) provide the New York Fed's trading
desk with market information and analysis
helpful in the formulation and
implementation of monetary policy. Primary
dealers are also required to participate in
all auctions of U.S. government debt and to
make reasonable markets for the New York
Fed when it transacts on behalf of its
foreign official account-holders.
Current List of Primary Dealers (22):
Bank of Nova Scotia, New York Agency
BMO Capital Markets Corp.
BNP Paribas Securities Corp.
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Capital Markets America Inc.
Deutsche Bank Securities Inc.
Goldman, Sachs & Co.
HSBC Securities (USA) Inc.
Jefferies LLC
J.P. Morgan Securities LLC
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Mizuho Securities USA Inc.
Morgan Stanley & Co. LLC
Nomura Securities International, Inc.
RBC Capital Markets, LLC
RBS Securities Inc.
SG Americas Securities, LLC
TD Securities (USA) LLC *newest addition (2/11/14)
UBS Securities LLC.
Source: http://www.newyorkfed.org/markets/pridealers_current.html#tabs-1
10
A Day In The Life…

Broker/Dealer Trading Desk
– KBCM as a broker
– More basic, straight-forward.
• Responding to customer inquiries
– Window Access
• Discount notes purchases
11
A Day In The Life…

Broker/Dealer Trading Desk
– KBCM as a dealer – buying for inventory
– More risk
– Bid Wanted In Competition (BWIC)
– Offer Wanted In Competition (OWIC)
– Positioning a portfolio - Long, short, hedged?
12
4
Other Considerations From A Dealer’s Perspective

KBCM as a dealer…
– How much is 1 basis point worth?
- “Dollar value of an .01” (DV01)
– Hedging
– Spread risk
– To go short, or to go long, that is the question.
13
Other Considerations From A Dealer’s Perspective

KBCM as a liquidity provider…
– Balance sheet
– Acting as a buyer/seller (market making on a smaller scale)
14
Thank You
Thank you for you time today and if you have any questions, please feel free to contact me:
Ryan Bilsky, CTP
Assistant Vice President
Fixed Income Trader
Keybanc Capital Markets
(216) 689-0368
Ryan.Bilsky@Key.com
15
5