US Treasury

Aug 2023 version

Training Materials
Internal Only

Training Materials
Table of Content
• Introduction (slide 3-7)
• US Treasury (slide 8-13)
• Trading Strategy (slide 14-18)
• Ways to analyze US debt (slide 19-28 )
• Buyers and Sellers (slide)

2
Why should I learn about Bonds and Fixed Income?

• US FED Interest Rate is a global topic and it has direct impact to the
bond market and bond prices
• Most high network individuals have exposure to bonds or bond
funds
• Most people have bought bond funds from retail banks or IFAs or
through their Mandatory Provident Fund.

• Bond funds and Income funds are popular products

• Bonds are very relevant to our clients even if the clients have
NOT bought bonds or bond funds through us.
• We should have a good understanding of US Interest Rate and
bond market to be relevant to our clients.

3
Why invest in bonds?

• Earn yield. Bonds is an interest baring or interest rate sensitive

instrument with credit exposure.

• An instrument for longer term money management.

• Money managers use bank deposit, certificate of deposit, medium term notes

• A must use tool for Treasury and cash management and used by:
• Banks, insurance companies, securities houses, fund managers
• Corporates, family offices

• Sovereign debt for cash management and local currency access

• Institutions use bonds to trade credit. Credit Spread and credit default
swap for return or hedge against their corporate exposure

• Floating rates notes, inflation linked bonds to manage inflation risk.

4
Why invest in bonds?

• For individuals, Yield seekers

• High Yield bonds
• Perpetual, Coco Bond
• Bond funds

• For sophisticated investors, they need to manage their

portfolio risk, asset and liability mismatch, target return,
• Credit spread
• Distressed debt
• Inflation linked
• Floating rates notes
• Credit Linked Notes
• Interest Rates Structured Notes

5
In an inflation environment, what should we look
at?
• Bond prices drop as interest rates go up

• We should check with clients to see if they have bond positions and
give them a heads up on potential bond price decreases

• Clients can buy bonds with short tenor to lock in the yield to
maturity.

• Clients should be cautious with the potential mark to market loss in

bonds or bond funds due to interest rate hike.

• Hold to maturity portfolio still has the same cash flow but the mark to
market is likely to suffer.

6
Where to find out about bonds?

• We have a 3 layers approach to serve our sales and clients:

• Top down macro view from our Investment Committee and published through our PWM
Monthly
• This drives our Product Ideas that are published through our products specific publications
• Our Products team and Specialists work with our Sales to serve our clients.

• Call our Products Dealing Desk

• Fixed Income Monthly pdf

7
US Treasury

Aug2023

8
Bond Characteristics

Internal Training Only.

What are US Treasury

- Issued by the US Treasury and guaranteed by the US government

- Can be purchase at a minimum of 100 USD

- Divided into two categories: marketable, non-marketable

10
Internal Training Only.
5 Types of US Treasury
- Short term treasury bills
- Period of 4, 8, 13, 26, 52 weeks to choose from

- Floating rate notes

- Period of 2 years
- Priced in the form of 13W bill’s yield + spread
- Dividends are paid quarterly

- Medium term notes

- Period of 2, 3, 5, 7, 10 years to choose from
- Coupons are paid every 6 months

- Long term treasury bonds

- Period of 20, 30 years to choose from
- Coupons are paid every 6 months

- Inflation protected securities

- Period of 5,10, 30 years to choose from
- Principal is adjusted every 6 months according to inflation index ratio

11

Internal Training Only.

Size of market
- US tradable treasury bond market has a total of 24 trillion USD
- US treasury bills accounts for 4.17 trillion
- Interest bearing notes accounts for 13.72 trillion
- Inflation protected bonds accounts for 1.93 trillion
- Floating rate notes accounts for 0.59 trillion

- US repo market accounts: 6 trillion USD

- US bond futures market accounts:1.5 trillion USD

- US dollar swap market: 127 trillion USD

- US corporate bond market: 15 trillion USD

12

Internal Training Only.

Issuance

1. Announcement a week before the auction

2. Bidding in the next week

3. Issuance settlement a few days after the bidding

13

Internal Training Only.

Trading Strategy

Aug2023

14
Trading Strategy (1)

1. Trading volatility – by using a combination of derivatives and cash bonds

a) E.g. selling short-term bond options (short put) to collect premiums,
− which allows purchasing of bonds at a discounted price if interest
rates rise significantly
− Can also capitalize the difference between actual and implied
volatility for arbitrage opportunities

15

Internal Training Only.

Trading Strategy (2)

2. Short term trading

a) E.g. trading based on expectation of the Federal Reserve’s
monetary financial conditions
b) E.g. trading based on economic data, such as inflation
(CPI, PCE), employment (JOLTS, payroll, ADP), economic
growth (GDP)
c) Future trading could be an option due to its low entry barrier

16

Internal Training Only.

Trading Strategy (3)

3. Hold and carry

a) Hold until maturity

4. Technical analysis
b) Focus on rich/cheap analysis

c) E.g. predicting future supply and demand conditions for government

bonds to trade on excess issuance or increased demand

17
Trading Strategy (2)

5. Cross-asset rotation trading

a) Involves seeking value across different asset classes, such as
comparing the dividend yield of the S&P 500 to US rates

b) Involve analyzing different countries' monetary policies and interest rate

differentials to trade sovereign bonds in countries with relatively higher
value

18
Ways to analyze US debt

Aug2023

19
Ways to analyze US debt

1. Feds policy
2. Economic data
3. Supply and demand of US debt
4. Market preferences
5. Other factors, like the amount of issuance of US
corporate bonds, MBS hedging

20
Fed communication

Fed Communication and Importance Level

FOMC Statements High
FOMC Press Conference High
FOMC Minutes High
Fed Official Speeches Moderate
Fed interviews Moderate
Desk Operating Statements Moderate
FED Balance Sheet Moderate
Fed Research Low
Fed Surveys Low

- FOMC press conference and statement are the most

important as it will announce its economic prediction
21

Internal Training Only.

Conference

- Dot plot from FOMC

summary

- suggests FOMC’s
view on future
interest rates
adjustment

22

Internal Training Only.

Fed Reserve Balance Sheet

 It reflects all expansions (QE) and contractions (QT)

 Asset :
 Focus on the outright holdings of Treasury bonds and
the Federal Reserve’s monetary tools

 Liability:
 Pay attention to the three major sources of market
liquidity

24
Internal Training Only.
Asset

25
Internal Training Only.
Liability

26
Internal Training Only.
How does FOMC adjust interest rate

 banks borrow and lend reserves among themselves overnight

to meet the reserve requirement the Federal Reserve

 FOMC implicitly adjusts the rate by controlling the money

supply,

 This will determine the short term interest rates (EFFR)\

 Changes in banks’ short term funding cost will reflect in areas

such as mortgages rates, corporate loans etc., influencing the
macro economy

27
Internal Training Only.
Federal Funds Effective Rate

28
Internal Training Only.
Bloomberg function

Aug 2023

29
Bloomberg function - ECSU

 ECSU – check whether the data is higher or lower than

concencus

30
Internal Training Only.
Buyers

Aug 2023

31
Types of Buyers
• Foreign investors • Pension funds
• Private and official sectors • Private and official sectors

32

Internal Training Only.

Sellers

Aug 2023

33
The disadvantages of using WACR

 WACR reported by fund companies and research service providers (e.g

Morningstar) usually understate true credit risk of the fund due to their linear scale
rating system

Under the linear scoring systems by Morningstar, all three funds would report BBB
WACR.

However, by using actual probabilities of default, the moderately dispersed and

dispersed portfolio would obtain a rating of BB- and B respectively

34
Internal Training Only.
Disclaimer

• The information in this presentation has been prepared solely for

informational purposes and training.
• It is not an offer, recommendation or solicitation to buy or sell, nor is
it an official confirmation of terms. It is based on information from
sources believed to be reliable.
• No representation is made to its accuracy or completeness or that
any returns indicated will be achieved. There may be some
assumptions used in this presentation. Changes to assumptions
may have a material impact on any returns details. Information,
prices and availability are subject to change without notice.

35