2’s : 2yr notes
5’s : 5yr notes
10’s: 10yr notes
ABX Index: A series of credit default swaps based on 20 bonds comprised of subprime mortgages.
Across the Curve: Every bond in the yield curve.
Back End: The long end of the yield curve. The opposite of Front End.
Basis Point (BP): .01%
Belly: The intermediate part of the yield curve. See wings
Beta: a number that measures the correlation if the returns of a security or portfolio to the returns of the market. A beta of zero means there is no correlation. A positive beta indicates that the asset moves in the same direction as the market, and a negative beta means the asset moves in the opposite direction of the market.
Big Bid: High demand for a security.
Bonds – 30yr Bonds
Breakeven Curve: A yield curve of the yield spread between TIPS and nominals.
Cheapest to Deliver (CTD): For a futures contract that can be settled by the delivery of more than one debt issue, this is the issue that is most profitable (cheapest) to deliver.
Capitulation: To give up on trying to recover market losses by exiting from a losing trade.
CapU: Short for capacity utilization, an economic indicator the measures the percentage of current economic output to the potential maximum output.
Carry: The accrued interest minus the cost of financing a securities position.
Cash Bonds: Actual bonds as opposed to bond futures.
Consolidate (Consolidative): A downward correction after a market has been rising.
Convexity Buying: When convexity players buy treasuries in a falling rate environment to hedge against the risk of negative convexity. The opposite of convexity selling or convexity paying. Also referred to as convexity hedging.
Convexity Flows: Convexity buying or selling.
Convexity Paying: See convexity selling.
Convexity Players: Mortgage Backed Securities investors, mortgage servicers, and mortgage related GSEs that use treasuries to hedge against the risk of negative convexity. Convexity players will buy treasuries in a falling rate environment because the price of the treasuries will increase and offset the effects of the negative convexity of the mortgages.
Convexity Selling: When convexity players sell treasuries in a rising rate environment to unwind hedges that they put on to hedge against the risk of negative convexity. The opposite of convexity buying.
Credit Default Swap: A swap contract in which the buyer purchases protection against the default of a credit instrument from the swap seller.
Decent Bid: Decent demand for a security.
Directs: A direct bidder in a treasury auction- a primary dealer. The opposite of Indirects
Dovish: Used by traders to describe the Federal Reserve FOMC attitudes towards interest rates to indicate a desire to have low interest rates; the opposite of Hawkish.
Fast Money: Leveraged buying of securities, typically by hedge funds. The opposite of Real Money.
Flatter (Flatten): Used by traders to describe changes in the yield curve to indicate a decrease in the difference short-term rates and long-term rates; the opposite of Steeper.
Flows: The flow of money into or out of a market.
Front End: The short end of the yield curve. The opposite of Back End.
Good Bid: Good demand for a security.
Great Bid: Great demand for a security.
Hawk (Hawkish): Used by traders to describe the Federal Reserve FOMC attitudes towards interest rates to indicate a desire to have high interest rates; the opposite of Dovish.
HC: Short for high coupon.
Hit: When a trader takes a market maker’s bid and sells the security.
Implied Volatility (IV): An estimated measure of the volatility of a security’s price. Implied volatility generally increases in a bear market, and decreases in a bull market.
Indexers: Money managers that create portfolios to match an index like the Lehman Aggregate Bond Index. Similar concepts exist in the equity markets when money managers are indexed to the S&P 500.
Indirects: An indirect bidder in a treasury auction that places their bid through a dealer. Because they are often foreign buyers of treasuries, traders often use this as an indication of how much foreign buying there has been in a treasury auction. The opposite of Directs.
Lift: When a trader takes a market maker’s offer and buys the security.
Long End: A reference to the long end of the yield curve, or longer maturity bonds.
Loop Effect: The phenomenon that certain technical factors will cause market price movements to feed upon themselves and accelerate the price movement. For example, rising prices can cause short sellers to buy into the rally to cover their shorts and limit their losses. This buying accelerates the rising prices.
Negative Convexity: A phenomenon attributable to callable bonds (particularly mortgage back securities) that causes the price to increase less, or even decrease, when interest rates decrease. The reason is that it becomes more likely that the principal is likely to be repaid and will have to be reinvested at the new lower rates.
Nominals: Regular treasury securities
Old Bonds: Off -the-run bonds, as opposed to current or on-the-run bonds.
Option Adjusted Duration (OAD): The measurement of duration adjusted for the first option (put or call, but usually a call) provision. Adjusting for a call provision will shorten the duration of a bond.
Option Adjusted Spread (OAS): A spread to the treasury yield that accounts for imbedded options in a bond that could result in an early redemption. It is usually used to account for the potential negative impact of mortgage prepayments on an MBS when interest rates fluctuate.
Play Large (Big): When the market aggressively participates in a treasury auction.
Play Small: When the market does not aggressively participate in a treasury auction.
Prime X Index: An index that allows investors to take positions on prime mortgage-backed securities through credit default swaps.
Real Money: Unleveraged buying of securities typically by money managers. The opposite of Fast Money.
Real Rates: The real level of interest rates that is free of credit risk premium and inflation premium. Also referred to as real yield.
Real Rate Longs: A trade position of being long TIPS
Real Yield Curve: The yield curve comprised of TIPS, or real yields.
Rock: Trader lingo for par. For example, I just traded some 10’s at the rock!
Secular: Long term.
Short End: A reference to the short end of the yield curve, or shorter maturity bonds.
Steeper (Steepen): Used by traders to describe changes in the yield curve to indicate an increase in the difference short-term rates and long-term rates; the opposite of Flatter.
Stop: The highest yield accepted in a treasury auction.
Swap Spreads: A swap is an over the counter agreement to exchange cash flows. Most often it is an exchange of a fixed interest rate payment with a floating one. There is default risk in a swap. The swap spread is the yield spread between swaps and the default risk free return of treasuries. Swap spreads are an indication of the markets aversion to risk. Because of the size and liquidity of the swap market, it is thought of as a better indicator than credit spread.
Tail: The spread, in basis points, between the when-issued yield of a treasury security just prior to auction and the highest yield (the Stop) of the auction. A tail indicates weak demand with demand being inversely related to the size of the tail (the larger the tail, the less demand for the bond).
Tailed: An auction that resulted in a tail, indicating a lack of demand.
Tick: In reference to the price of a bond as expressed as a percentage of par, a tick is 1/32nd or .03125 of a point.
Two-Way Flows: Active buying and selling from investors in a security.
Ultralongs: The 30-year bond.
Waving it in: When a trader likes a security so much that they want to buy large quantities. Also referred to as backing up the truck.
Wings: The short end and long end of the yield curve. See belly.
Yard: A billion dollar trade.
Zero Volatility Option Adjusted Spread: A measure of cash flow spread of an MBS over the treasury yield curve that takes into account the prepayment risk of the MBS.A measure of cash flow spread of an MBS over the treasury yield curve that takes into account the prepayment risk of the MBS.
Posted by John Adams on 
