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Trading Treasuries

The US Treasury Bond market is one of the most liquid markets in the financial world.

A United States Treasury security is a government debt issued by the United States Department of the Treasury through the Bureau of the Public Debt. Treasury securities are the debt financing instruments of the United States federal government, and they are often referred to simply as Treasuries. They represent direct obligations of the U.S. government. Treasuries have very little credit risk and are backed by the full faith and credit of the U.S. government. There are four types of marketable treasury securities: Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation Protected Securities (TIPS).

Treasury bills (or T-Bills) mature in one year or less. Like zero-coupon bonds, they do not pay interest prior to maturity; instead they are sold at a discount of the par value to create a positive yield to maturity. Many regard Treasury bills as the least risky investment available to U.S. investors. Treasury bills are quoted for purchase and sale in the secondary market on an annualized discount percentage, or basis.

General calculation for the discount yield for Treasury bills is:
Treasury bills

Treasury notes (or T-Notes) mature in two to ten years, have a coupon payment every six months, and have denominations of $1,000. In the basic transaction, one buys a "$1,000" T-Note for say, $950, collects interest over 10 years of say, 3% per year, which comes to $30 yearly, and at the end of the 10 years cashes it in for $1000. So, $950 over the course of 10 years becomes $1300.

Treasury bonds (T-Bonds, or the long bond) have the longest maturity, from twenty years to thirty years. They have a coupon payment every six months like T-Notes, and are commonly issued with maturity of thirty years. The secondary market is highly liquid, so the yield on the most recent T-Bond offering was commonly used as a proxy for long-term interest rates in general. This role has largely been taken over by the 10-year note, as the size and frequency of long-term bond issues declined significantly in the 1990s and early 2000s

STRIPS are zero-coupon securities created by the U.S. Treasury by physically separating the principal and interest cash flows. This process of separating cash flows from standard fixed-rate Treasury securities is referred to as "coupon stripping." Similar "trademark" securities with such acronyms as CATS and TIGRs are created by investment banks.

STRIPS is the U.S. Treasury's acronym for "Separate Trading of Registered Interest and Principal Securities," the Treasury's program developed in 1985 to facilitate the stripping of designated Treasury securities. All new Treasury bonds and notes with maturities of 10 years and longer are eligible to be stripped under this program and are direct obligations of the U.S. government. Under the STRIPS program, the holder of any eligible security can request that the U.S. Treasury create separate book-entry instruments for all of the principal and interest cash flows. The principal and interest portions of these instruments are assigned separate CUSIP numbers and may be owned and traded separately.

All of the marketable Treasury securities are very liquid and are heavily traded on the secondary market.

Primary Market

Treasury notes and bonds are issued through yield auctions of new issues for cash. Bids are separated into competitive bids and noncompetitive bids. Competitive bids are made by primary government dealers, while noncompetitive bids are made by individual investors and small institutions. Competitive bidders bid yields to three decimal places for specific quantities of the new issue.

Secondary Market

Secondary trading in Treasuries occurs in the over-the-counter (OTC) market. In the secondary market, the most recently auctioned Treasury issue is considered current or on-the-run. Issues auctioned before current issues are typically referred to as off-the-run securities. In general, current issues are much more actively traded and have much more liquidity than off-the-run securities. This often results in off-the-run securities trading at a higher yield than similar maturity current issues.

Market Participants

Sell Side

All U.S. government securities are traded OTC, with the primary government securities dealers being the largest and most important market participants. A small group of interdealer brokers disseminates quotes and broker trades on a blind basis between primary dealers and users of the Government Securities Clearing Corporation (GSCC), the private clearinghouse created in 1986 to settle trades for the market.

Buy Side

A wide range of investors use treasuries for investing, hedging, and speculation. This includes commercial and investment banks, insurance companies, pension funds, and mutual fund and retail investors.

Market Transparency

Price transparency is relatively high for Treasury securities since several information vendors disseminate prices to the investing public. Govpx, an industry-sponsored corporation, disseminates price and trading information via interdealer broker screens. Prices of Treasuries are active and visible.

Market and Interest Rate Sentiment

Treasury Bonds are used to denote investor sentiment and are used as an indicator to the health of the economy. If bond prices rise we might see a slowdown of general economic activity.

If bond prices fall we might see a rise in interest rates. Bonds measure how well an investor thinks a country is doing, if the economy is booming there is less need for the Government to borrow money.

If we have huge potential of default on corporate debts then treasury bonds become more attractive for security.

Contact Us for interest rate trading opportunities in leveraged cash Treasuries, Interest Rate Futures and Options and T-bond CFDs.

Corporate Bonds

Corporate Bonds are debts issued by industrial, financial and service companies to finance capital investment and operating cash flow. In terms of total face value of bonds outstanding, the corporate bond market is bigger than each of the markets for municipal bonds, U.S. treasury securities, and government agencies securities. Investors in corporate bonds have a wide range of choices when it comes to bond structures, coupon rates, maturity dates, industry exposure and credit quality.

Total Return (Index) measures the total amount earned by owning a security over the time period. It incorporates the accrued interest on the bond during ownership, coupons paid out on the bond, and rise and fall of the bond's price. It is the most complete measure of the amount of money made on holding fixed income issues in the index.

U.S. High-Grade Trading Platforms

When it comes to market pricing information and efficiency in execution, MarketAxess is the undisputed leader in the electronic trading of U.S. high-grade corporate debt, both fixed rate bonds and floating rate notes (FRNs).

Alliance FX Capital, Ltd. clients have Instant access to 67 broker-dealers supporting a comprehensive range of securities. Our clients can choose amongst $30+ billion and 12,000+ line items of dealer inventory. The Market Aggregate Statistics provides an end-of-day recap of secondary corporate bond market activity in publicly traded TRACE eligible securities.

AFXC Institutional Investors experience superior liquidity, speed and efficiency delivered by having direct access to an award-winning trading technology.

AFXC uses The MarketAxess Bond Trading Platform in executing most all of our liquid market Bond and Credit trades. See MarketAxess Institutional Trading Platform Description

Regional Corporates and Covered Bonds

Alliance FX Capital, Ltd. (AFXC) is a fixed income advisor and portfolio manager focused on finding yield divergence from underlying true company values. We are value investors in high yield bond opportunities. We specialize in South East Asian and Eastern European Corporates.

Covered Bonds are rapidly gaining appeal with Asian Investors.

Asian Investors, seeking a "safe haven" with some yield in turbulent markets are increasingly attracted to this market. Covered Bonds are securities created from public sector loans or mortgage loans where the security is backed by a separate, segregated and trust protected group of loans typically held by issuing banks.

Covered Bonds typically carry a 2-10 year maturities and enjoy relatively high credit ratings, depending on the quality of the pool of loans ("cover pool") backing the bond. Covered Bonds are often attractive to investors looking for high-quality instruments that offer attractive yields. They provide an efficient, lower-cost way for lending banks to expand their business rather than issuing unsecured debt instruments.

For Asian Investors seeking safe havens with yield in today's volatile markets, Covered Bonds are increasingly attractive for fixed income portfolios. Since their introduction in 1769 in Europe, Covered Bond issuers there have had a flawless payment record for close to 250 years.

The U.S. entered the Covered Bond market in 2006.

AFXC has identified this asset class as currently one of the fastest-growing bond markets in the world with markets in Asia, Australia, the Middle East, Europe, North America, and South America looking to establish covered bond legislation to enable their local banks to finance through these securities.

Covered Bonds are high-quality securities, for the most part AAA-rated, which are backed or "covered" by the bank's best assets. The collateral pools over-collateralize the bonds issued.

The assets tend to be prime first-ranking mortgages, high-quality public-sector assets, or a combination of the two. Over-collateralization can be as high as 30 percent or more. Should an asset in the covered bond pool deteriorate in quality, the covered bond issuer is required to replace it with a high-quality, performing one. The assets in the covered bond “cover pools” are ring-fenced and cannot be touched.

The Covered Bond market worldwide currently has around 2 trillion Euro worth of outstanding volume in various currencies. Private Banks and bank treasuries throughout Asia are increasing their participation in this asset class.

Alliance FX Capital, Ltd. can help guide you to these exciting fixed income opportunities as they emerge in the markets we cover. Do Contact Us

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