A fixed income trader is an investment professional who specializes in trading securities that pay a fixed rate of return. Fixed income securities normally take the form of debt securities, such as bonds, and a fixed income trader buys and sells these securities on behalf of an investment firm or individual investors. Successful income traders use a variety of securities to generate a steady return for investors over a long period of time. A fixed income trader receives sales-related commission based on either the performance of purchased assets or on the volume of trading.
Debt securities are sold by corporations and governments to raise money for short-term expenses. The debt issuer agrees to pay a certain rate of interest to the bondholder for a specific period of time. Bondholders can hold the debt instrument to maturity or sell it on the secondary investment market. When interest rates are rising, bondholders often have to sell low yield bonds at a discount price, whereas when interest rates are falling, old bonds paying higher yields are often sold for a premium. A fixed income trader attempts to buy bonds at a discount and sell bonds for a premium in order to generate a profit.
Anyone working as a fixed income trader must be licensed to sell securities. Securities licensing occurs on a country-by-country basis, but traders licensed in one place are usually able to obtain similar licenses elsewhere by transferring their credentials without having to pass the local licensing examination. Many fixed income traders move into the field after spending some time working as an investment broker. Companies hiring traders usually prefer applicants to have a degree in finance or a related field, although degrees are not technically required.
A fixed income manager must have a broad knowledge of the investment arena and have the ability to make predictions about the future movement of debt securities. Many retirees invest heavily in fixed income funds, and traders must ensure that people investing in conservative fixed income funds are not exposed to undue levels of risk. Inflation can cause the spending power of people on fixed incomes to diminish over time, so fixed income traders must also attempt to balance risk with the need to outpace inflation.
Some fixed income traders specialize in trading non-conventional income securities, such as derivatives, to try and increase income potential. Derivatives take many forms but work similarly to insurance contracts, with one party agreeing to insure another against possible future losses in value of a particular security or fund. A derivative has no stand alone value, as its value is entirely based on the instrument it is tied to, and consequently these securities are more risky than debt instruments. Fixed income traders can only buy derivatives if buying such securities is in line with the fund strategy or the wishes of individual investors.