What is Fixed Income?

Fixed income refers to a type of investment security that pays investors fixed interest or dividend payments until its maturity date. At maturity, investors are repaid the principal amount they originally invested. Fixed income includes securities like treasury bills and notes, corporate bonds, agencies, certificates of deposit, sovereign bonds, municipal bonds, structured notes, and others.

Characteristics of Fixed Income Investments

Regular Income Stream: Fixed income securities typically provide a steady and predictable stream of income through regular interest or dividend payments.
Return of Principal: At maturity, the investor expects to receive back the principal amount of the investment.
Interest Rate: The interest rate (or coupon rate) on fixed income securities is usually set at the time of issuance and remains constant throughout the life of the security.

Types of Fixed Income Securities (non-exhaustive)

(The below are types of fixed income securities currently offered by Moment. See our Guide: Reference Data Glossary for more comprehensive information on each of the below types. Moment's team is continuously updating available asset classes).

US Treasuries: Issued by the US federal government, these are generally considered risk-free investments. Examples include US Treasury bills, notes, and bonds.
Municipal Bonds: Issued by state and local governments, these bonds often offer tax-exempt interest payments.
Corporate Bonds: Issued by companies, these bonds typically offer higher yields compared to government bonds, but with higher risk.
Agencies: Issued by a United States government-sponsored enterprises or federal agencies (federally chartered corporations that are publicly owned by stockholders), these securities may offer slightly higher yields than US treasuries, with slightly higher risk.
Certificate of Deposits (CDs): Offered by banks, CDs are time deposits with a fixed term and interest rate.
Sovereign Bonds: Issued by a national government either in a domestic or foreign currency.

Why Invest in Fixed Income?

Income Generation: Fixed income investments are popular among investors who seek a regular income stream.
Risk Management: These securities are generally considered less risky than stocks, making them a useful tool for risk management and portfolio diversification.
Capital Preservation: Fixed income securities are often used for capital preservation, especially those issued by stable governments and corporations.
Predictability: The fixed payments involved in fixed income provide predictability in cash flow and returns, which is valuable for long-term financial planning.
Interest Rate Sensitivity: Fixed income securities are sensitive to changes in interest rates. When interest rates rise, the value of existing fixed income securities generally falls, and vice versa.

Risks Involved

Though generally considered less risky than equities, there are a few types of risks involved within investing in fixed income. (See the Reference Data Glossary for more information on how each type of security is affected by these various risks.)

Credit Risk / Default Risk: The risk that the issuer will default and be unable to pay the interest or principal.
Interest Rate Risk: The risk that changes in market interest rates will affect the value of fixed income securities.
Inflation Risk: The risk that inflation will erode the purchasing power of the fixed payments.
Liquidity Risk: The risk that an investor might not be able to sell the bond easily at its market value. Some bonds, especially those that are not widely traded, can be hard to sell at a fair price.
Currency Risk: For investors holding bonds in a currency different from their home currency, there is a risk that currency exchange rates may change unfavorably, affecting the bond's value and interest payments when converted back to the investor's home currency.
Call Risk: Some bonds have a "call" feature, allowing the issuer to redeem the bond before its maturity date. This often happens when interest rates fall, and can force investors to reinvest the principal at lower rates.
Political and Regulatory Risk: Changes in government policy or regulations can affect the value of bonds. This is especially true for government and municipal bonds.
Market Risk: Also known as systematic risk, this is the risk of the overall market impacting the value of the bond, irrespective of the bond's specific qualities.

How is Fixed Income Traded?

Fixed income securities are traded in a different manner compared to equities. The trading of these securities has evolved significantly over time, incorporating more technology and electronic platforms in recent years. Below is an overview of the different ways fixed income can be traded today:

1. Electronic Trading Platforms:

Increased Usage: There's been a significant shift towards electronic trading platforms for fixed income securities. These platforms increase efficiency, transparency, and accessibility in the bond market.
Examples: Platforms like Bloomberg, MarketAxess, and Tradeweb are popular among institutional investors for trading bonds.

2. Over-the-Phone:

Traditional Method: Much of fixed income trading, particularly in the corporate and municipal bond markets, still occurs over-the-counter. This means trades are conducted directly between two parties, without a centralized exchange.
Dealer Networks: Banks and financial institutions act as dealers, buying and selling bonds from their own inventories.

How is Fixed Income Data Used?

Fixed income reference data is crucial for all parties involved in trading fixed income securities. It provides the critical details required for the accurate and efficient processing of financial transactions including:

Identification of Securities: Reference data is necessary for accurately identifying fixed income securities. Each bond has unique characteristics like issuer, maturity date, coupon rate, if the bond is callable, when and how it can be called, and many other features. Proper identification of bonds and their characteristics is crucial for trading and settlement purposes.
Informed Trading Decisions: Investors need access to current and historical data to make informed trading decisions. For bonds, this includes understanding the creditworthiness of the issuer, the bond’s duration, and its position in the yield curve, to name a few.
Risk Management: By providing detailed information about a bond, such as its maturity, coupon, issuer credit quality, and any call or put features, reference data allows investors and traders to assess and manage the risks associated with each bond.
Pricing and Valuation: Accurate reference data is critical for the proper pricing and valuation of fixed income securities. Factors such as the bond's interest rate, maturity date, and credit rating influence its market value. Incorrect or incomplete data can lead to mispricing, which can lead to losses for investors.
Compliance and Reporting: Regulatory compliance requires accurate reporting of trades and holdings. Having a bond's reference data helps ensure that all necessary information is available and accurate, facilitating compliance with various regulations and reporting standards.
Settlement and Clearing: For the successful settlement of fixed income trades, detailed reference data is required, including information about the bond's issuer, coupon payments, maturity date, etc.
Liquidity Assessment: Reference data helps in assessing the liquidity of a bond by providing information on the issue size, trading volume, and market participants. This is important for understanding the ease with which a bond can be bought or sold in the market.
Portfolio Diversification and Management: Investors and financial advisors need reference data to manage portfolios effectively. Having quality reference data precludes assessing diversification, measuring performance against benchmarks, and ensuring alignment with investment strategies and objectives.
Market Analysis: Reference data can also be used for market analysis, helping traders and investors understand trends and opportunities in the fixed income market.

Equities vs. Fixed Income Data Comparison

Fixed income and equities are fundamentally different asset classes. Consequently, the data landscapes and the data associated with each reflects are vastly different.

1. Data Types Comparison:

Equities Data: Typically includes stock prices, dividends, earnings, market capitalization, and price-to-earnings ratios. This data is readily available and updated frequently due to the high liquidity and frequent trading of stocks.
Fixed Income Data: Involves interest rates, yield, maturity date, coupon rate, credit rating, and price. Unlike equities, bond data is often less transparent and harder to access, especially for individual or less frequently traded bonds.

2. Price Discovery and Transparency:

Equities: Stock prices are easily available in real-time, reflecting the latest market sentiment and information.
Fixed Income: Bond pricing historically is far more opaque. Prices are often determined by dealer quotes or through valuation models, as bonds may not trade as frequently as stocks.

3. Market Liquidity:

Stock Market: Generally more liquid, with real-time trading data.
Bond Market: Liquidity varies greatly depending on the bond type. Many bonds, especially municipal and corporate bonds, trade less frequently.

4. Yield and Interest Rate Data:

Fixed Income Specific: The analysis of bonds requires a focus on yield, interest rate movements, and the bond's sensitivity to these changes (duration and convexity). Such data is specific to the fixed income market.

5. Credit Risk Information:

Crucial for Bonds: Credit ratings and default risk assessments are critical for bond valuation but are less relevant for equities.