A fixed income trader is a financial professional who focuses on trading securities with a fixed rate of return. Fixed income securities are usually debt securities, such as bonds, which a fixed income trader buys and sells on behalf of an investment firm or individual investors. Successful income traders employ a variety of securities to provide investors with a consistent return over time. A sales-related commission is paid to a fixed income trader based on the performance of purchased assets or the volume of trading.
Corporations and governments sell debt securities to raise funds for short-term expenses. The debt issuer agrees to pay the bondholder a set rate of interest for a set period of time. Bondholders have the option of holding the debt instrument until it matures or selling it on the secondary market. When interest rates rise, bondholders are forced to sell low-yield bonds at a discount, whereas when rates fall, older bonds with higher yields are frequently sold at a premium. To make a profit, a fixed income trader tries to buy bonds at a discount and sell them at a premium.
A license to sell securities is required for anyone working as a fixed income trader. Securities licensing varies by country, but traders who have been licensed in one place can usually obtain similar licenses in another by transferring their credentials without having to pass the local licensing exam. After working as an investment broker for a while, many fixed income traders make the switch. Although degrees are not technically required, most companies hiring traders prefer applicants to have a degree in finance or a related field.
A fixed income manager must have a broad understanding of the investment world and the ability to forecast the movement of debt securities in the future. Many retirees put a lot of money into fixed-income funds, and traders must make sure that those who invest in conservative fixed-income funds aren’t taking on too much risk. People on fixed incomes’ spending power can erode over time due to inflation, so fixed income traders must strike a balance between risk and the need to outpace inflation.
To try to increase income potential, some fixed income traders specialize in trading non-traditional income securities, such as derivatives. Derivatives come in a variety of shapes and sizes, but they all work in the same way as insurance contracts: one party agrees to insure another against potential future losses in the value of a particular security or fund. Because the value of a derivative is entirely dependent on the instrument to which it is linked, these securities are riskier than debt instruments. Fixed income traders can only purchase derivatives if doing so is in line with the fund’s strategy or individual investors’ wishes.