Accrued Interest: Bond Market Jargon

Break the buck

2007-12-03T16:27:00.001-05:00

Term for a money market portfolio which losses money. The term stems from the fact that money markets are always priced at $1/share, so if the net asset value falls below $1, (breaks the buck) the fund has lost money.

CDO^2 (CDO Squared)

2007-11-27T17:30:00.001-05:00

A CDO which has other CDO's as collateral.

Lift

2007-11-15T16:49:00.001-05:00

To purchase a bond at its offered price, especially without bidding back.

E.g. "I got lifted on 10mm GNR 2006-14 A at E+20."

This means that the trader had owned $10 million of this GNMA CMO, and sold it to an investor at a spread to the Eurodollar curve of 20bps.

Prop desk

2007-11-15T16:39:00.001-05:00

Term for traders who use a dealer firm's capital to try to make profit for the firm. This is different than traders who work to fill customer orders (sometimes called "trading the flow"). A prop trader acts more like a hedge fund, where as flow traders are really more like wholesalers who buy bonds, mark the up a little, and then sell them. Its possible that bond salespeople may use the prop desk's positions as inventory, but that is not its primary purpose.

Crossover

2007-11-13T08:18:00.002-05:00

Term for a bond rated below investment grade by one rating agency but investment grade by another.

6 B

2007-11-13T08:18:00.001-05:00

Term for a bond rated Baa/BBB.

Under

2007-11-13T08:16:00.001-05:00

Short for underlying. Often bonds sold with insurance also are given a rating as if there were no insurance. This is called the underlying rating.

E.g. The bond is rated AAA MBIA with a AA under.

Translation: The bond is rated AAA because of MBIA insurance and would have been rated AA without the insurance.

Trip

2007-11-13T08:15:00.000-05:00

Short for triple, specifically AAA. Usually phrased as "trip trip" indicating that both Moody's and S&P rate the bond Aaa/AAA.

Wrapped

2007-11-13T08:12:00.000-05:00

A "wrapped" bond is insured by a third party, most commonly by a monoline insurance company, such as MBIA, AMBAC, FGIC, FSA, or XCLA. This is very prevalent in the municipal bond market and somewhat common in ABS.

E.g. The bond is A under with a FGIC wrapper.

Translation: The bond is rated AAA/Aaa due to FGIC insurance, and would be rated A without insurance.

Haircut

2007-08-25T07:41:00.000-05:00

A term used to describe the amount of leverage allowed in a reverse repo transaction. For example, if the haircut on a corporate bond is 10%, that means the owner of the corporate bond can borrow 90% of the purchase price. Put another way, the buyer can get 10x leverage on the position.

The amount of haircut is generally a function of the credit quality and duration of the bond. In addition, the haircut is often negotiated by the borrower, which means that a dealer's better customers may be afforded lower haircuts. Long Term Capital Management infamously negotiate extremely low haircuts on their transactions.

Retail

2007-08-15T16:12:00.000-05:00

A retail investor is any individual investor. Even fairly large individual investors are usually considered retail.

A retail broker is a broker who works with individual investors. Basically your classic stock broker.

A retail shop is a broker/dealer whose primary business is retail investors. For example, Charles Schwab or to a lesser extent, Merrill Lynch.

A retail bond is any bond designed to sell to retail investors. The classic example of a retail bond is one that has a relatively high yield but does not have a good total return profile, like many callable agencies.

Leak

2007-04-24T16:31:00.000-05:00

Used as a verb to describe a situation where a particular bond is slowing losing value. Most often used to describe a corporate bond's spread slowly increasing.

Example: Comcast bonds have been leaking out all week. (Translation: Comcast bonds are slowly increasing in yield spread vs. Treasuries.)

One would generally interpret a leak in a particular bond as meaning there are more investors interested in selling the name as opposed to buying it. So on any given day either dealer desks or end accounts need to be enticed to buy with just a little more yield spread. The opposite would be gapping.

Gap

2007-04-24T16:23:00.000-05:00

Used as a verb to describe a period when the market is moving by wide margins suddenly. I'm not sure where the term comes from, although I always assumed it had its origins in technical analysis. On a candlestick chart of spreads or yields, a day where some bond has a "gap" move will look like a disconnect rather than a continuous trend.

Example: Stories that New Century may declare bankruptcy as early as today has financial spreads gapping wider. (Translation: financial bonds spreads are increasing at a rapid pace.)

If a bond's spread is gapping wider or tighter, that suggests a fundamental change in the market's view of the bond's risk. If the whole market is gapping, that indicates a broad repricing of risk.

The opposite would be a leak.

Pick

2007-04-24T06:56:00.000-05:00

Traders use the term pick to describe how much yield is improved by doing a trade. For example, if a trader told you that you could sell MER senior notes and buy sub notes and "pick 20", that simply means that the sub notes can be bought with 20bps more yield than the senior notes.

Also, in the municipal market, PICK is a bulletin board on Bloomberg where dealers post municipal offerings.

NC

2007-04-24T06:54:00.000-05:00

Short for non-call. Can be used to describe a bond which is not callable at all, or the time period until which the bond becomes callable. For example, a 5YR NC 1 is a bond with 5 years to maturity and callable after 1 year.

Carry

2007-04-24T06:50:00.000-05:00

Carry is the income return of a bond or trade. This term is used in a variety of situations.

Example
Our mutual fund's strategy is to consistently overweight high-quality corporate bonds while under-weighting Treasuries. This should allow the fund to outperform on carry. (Translation: since the corporates out-yield the Treasuries, this portfolio manager expects to outperform his/her index by simply out-yielding it.)

Example
We recommend selling your 2-year agency bullets for 2yr NC 1. You pick 25bps of carry. (Translation: By selling the bullet for the callable, you increase yield by 25bps)

Example
The mortgage REIT pared back on its leverage as the inverted yield curve was killing their carry. (Translation: Mortgage REITs rely on borrowing in the REPO market and investing the proceeds in mortgage loans. If the REPO rate rises but the yield available on the mortgage loans does not, the strategy is less attractive. In this case, carry is net of hedging and borrowing costs.)

Protection

2007-04-22T08:57:00.000-05:00

Another term for a CDS contract.

Example: After Comcast's earnings report, we saw large buyers of 5-year protection. (Translation, after the report, many buyers were looking for protection against Comcast defaulting via CDS contracts.)

Big Swinging Dick

2007-04-22T08:38:00.000-05:00

Term for a Wall Street rainmaker, popularized by Michael Lewis' book Liar's Poker. The book describes a time on Wall Street where bond sales was a more lucrative business than it is today. Today the term is more often used pejoratively to describe someone who has delusions of grandeur.

Cash

2007-04-22T07:51:00.000-05:00

The term "cash" is used to mean various things, other than currency.

1) Any money market-eligible bond, such as T-bills, commercial paper, and agency discount notes. If a mutual fund manager says s/he has 5% in cash, they generally mean these types of bonds.

2) Term for settling a bond on the same day as the trade. Normally corporate and municipal bonds settle in 3 days and Treasuries and Agencies settle in 1 day. A cash settle happens the same day.

3) Term to differentiate between a traditional security and a derivative.

Example: Alltel cash is outperforming CDS today as LBO rumors are growing. (Translation: traditional Alltel corporate bonds are performing better than credit default swaps in the name in the face of LBO stories. This would most likely be because of speculation that the cash bonds would be tendered.)

Example: In Treasuries, Asia came in for $10 billion in the cash market today. (Translation: There were buyers of $10 billion of Treasury bonds out of Asia. They were not buying in the futures market.)

Junk

2007-04-19T07:57:00.000-05:00

Another name for high-yield or non-investment grade debt. Includes any Moody's rating below Baa3 (or from Ba1 down) and any S&P or Fitch rating below BBB- (or BB+ on down).

Notch

2007-04-19T07:29:00.000-05:00

In credit ratings, a notch is a small step up or down in rating. In Moody's parlance, going from A1 to A2 is one notch down. In S&P and Fitch terminology, it would be from A+ to just A.

The term "notching" refers to the ratings agency's habit of rating related debt by simply adjusting the rating up or down a certain number of notches. For example, Merrill Lynch is rated Aa3 by Moody's. Merrill's subordinated debt is rated A1, or one notch lower. Their preferred stock is rated A2, or two notches below their senior debt. This reflects the fact that in the event of bankruptcy the senior debt is in a superior position versus either the sub or preferred. The truth is that notching is really not a result of careful analysis in most cases. Sub debt is almost always one notch below senior debt, and preferred stock one notch lower still. Sometimes if there is no sub debt the preferred might get better treatment, and sometimes if there is extensive secured debt the sub debt might be more than one notch lower.

In reality, the rating is supposed to reflect the expected loss on the bond. But in the case of sub debt, your probability of default is exactly the same as the senior note. However the severity of loss is much greater. Whether that translates to exactly one notch or not depends on a myriad of factors.

Securitize

2007-04-19T07:16:00.000-05:00

The process of turning any stream of cash flows into a security. The most common example is mortgage-backed bonds, which are a pool of residential mortgages which have been securitized. Other consumer (auto, boat, home equity, credit card, student loans) and commercial loans (commercial mortgages, leases) are commonly securitized.

Basis

2007-04-17T06:49:00.000-05:00

In general trading, basis is a term used to generally describe the yield spread of a broad category of bonds. For example, one might refer to the "corporate basis," to mean the spread of corporate bonds generally.

Example
The corporate basis is a couple wider today after a weak New Home Sales report. (Translation, the homes report caused corporate bonds in general to widen by a couple basis points, indicating that the home sales report was viewed as a broad economic indicator and not limited to housing sensitive companies.)

Basis can be used to describe more or less specific segments of the market. For example, in corporates, one might describe the broad corporate basis, the finance basis, or the brokerage basis. In mortgages, you might describe the mortgage basis, the 15-year basis, or the whole-loan basis.

The ubiquity of this term reveals something about the investment-grade bond market: most similar corporate bond spreads move together. For example, it would be very unusual for Bank of America bonds to move substantially different than Wachovia or Wells Fargo bonds on any given day. So if I were an owner of Bank of America bonds and saw they were trading tighter on the day, I'd first check the movement in other large banks. Most likely I'd see that other banks are moving in exactly the same manner. I'd know that the movement does not likely have anything to do with Bank of America per se, and more to do with sentiment surrounding banks in general.

In hedging, basis risk refers to the chance that the hedge doesn't move exactly with the bonds being hedged. For example, if you are hedging a portfolio of MBS with LIBOR swaps, it is possible that prepayment speeds will change such that your hedge becomes mismatched.

Event Risk

2007-04-17T06:44:00.000-05:00

Event risk is the chance that some non-systemic, one-off event will impact your investment. In bonds, a classic example of event risk would be a LBO. Other examples would be mergers, large share buy-backs, union strike, loss of major customer/supplier, fraud, etc. Event risk does not describe some general economic/political event, such as 9/11.

Bullet

2007-04-11T07:02:00.000-05:00

A bond with no call, put, or sinking fund feature. Bonds with no call feature other than a make-whole call are usually called bullets as well. This term is most commonly used in the agency and municipal markets, where call features are common.

Fast money

2007-04-07T10:30:00.000-05:00

Speculative investors in the bond market, such as hedge funds and dealer traders. The opposite is real money. In analyzing market moves on a given day, one may draw different conclusions depending on whether fast money or real money is driving the move.

Real money

2007-04-07T10:13:00.000-05:00

A long-term bond market investor, such as a mutual fund, insurance company, investment manager, pension fund, retail buyer, etc. The opposite is fast money. In analyzing market moves on a given day, one may draw different conclusions depending on whether fast money or real money is driving the move.

On-the-run

2007-04-06T06:51:00.000-05:00

In the Treasury market, describes the most recently auctioned 2, 3, 5, 10 and 30-year bonds. For purposes of quoting corporate bonds in spread, the nearest on-the-run Treasuries are almost always used. Liquidity tends to be slightly better in on-the-run issues, and it also tends to be easier to short-sell on-the-run issues.

Bond market pros will refer to the on-the-run Treasuries generically by the number of years to maturity. For example, "the 10 year" or even just "10s" is often used to mean the most recently auctioned 10-year issue.

Example
I can bid Merrill Lynch '15's at +89 vs 10's. (Translation: This person is offering to buy Merrill Lynch bonds maturing in 2015 at a yield equal to 89bps greater than the on-the-run 10-year Treasury.)

In corporate and agency bonds, on-the-run refers to large issues which trade frequently. There is no official means of defining what issues are on-the-run versus not. It is whatever issues tend to be favored by traders. Usually issues considered on-the-run have maturities centered around 5, 10, and 30-years. Similarly, most on-the-run issues have bullet maturities. Also bonds deliverable into CDS contracts for large issuers are common on-the-run issues.

Any other issue is considered "off-the-run."

Tick

2007-04-05T19:02:00.000-05:00

1/32 of a point. Most commonly used in regards to Treasury and mortgage bonds, which are quoted in fractions as opposed to decimals. Sometimes also used in Agencies. Why do we insist on using fractions still? That's the U.S. bond market in a nutshell. Its pointless and stupid, but its been that way forever and no one wants to change.

Example
The 10-year was up 3 ticks on the day after core CPI slowed last month.

Buck

2007-04-05T18:29:00.000-05:00

1/10 of a point in dollar price. Bonds are priced as a percentage of par, and "one bond" is considered 1,000 par amount. Therefore 1/10 of a point is $1 per bond. This is most commonly used by bond brokers in communicating how much commission is in the bond.

Example
The bonds are offered at 4.50% less 2 bucks. (Translation: The bond in question can be purchased at a price 2/10ths of a point less than what would be a 4.50% yield. Municipal bonds are often offered this way in between dealers. The implication is that the bond could be sold to an eventual customer at a yield equal to 4.50% and the dealer could make $2 in profit.)

Beep

2007-04-05T18:26:00.000-05:00

1 basis point (0.01%).

Example
Goldman Sachs bonds are 3 beeps tighter today. (Translation: The spread between Goldman Sachs bonds are comparable Treasuries has narrowed by 0.03%)

Tighter

2007-04-05T18:25:00.000-05:00

Generally refers to a decrease in the spread of a security.

Example
Washington Mutual bonds tightened today on rumors the company may be taken over by a larger bank.

Wider

2007-04-05T18:22:00.000-05:00

Generally refers to an increase in the spread of a security.

Example
Ford spreads are wider today after the company reported a 3rd quarter loss.

From the makers of Accrued Interest... Bond Market Jargon

2007-04-05T06:57:00.000-05:00

Hi. I'm TDDG. You may know me from such blogs as Accrued Interest and... well that's it. Anyway, I'm starting a cousin site for posts of bond market jargon. If you've found anything here useful, please visit the main site at http://accruedint.blogspot.com. I will be using this blog to define bond geek speak I use over there.

I'm not planning on defining a lot of technical terms. Sites like investopedia do a pretty good job of that. This will be more about the jargon, cliches, and slang bond pros use every day. Some of it may be used in other markets or other professions, and some might have slightly different connotations in other markets. I'm focusing entirely on the bond market.

The format will be simple. I'll post the word in the title and the definition in the post. Use the search function to find a work you're looking for. I'll update periodically.

Enjoy.