Interest Rate Markets
Practical guide to trading rates, swaps and futures.
Summary
Siddhartha Jha wrote this as a practitioner's introduction to trading fixed income, aimed at someone who understands finance generally but has not worked on a rates desk. It covers the instruments, the analytics and the trade structures used in United States interest rate markets.
The first part covers the products: Treasury bills, notes and bonds, the repo market, Eurodollar and Treasury futures, interest rate swaps, and options including swaptions and caps. The second covers the analytics: yield curve construction, forward rates, duration and convexity, carry and roll-down, and the decomposition of curve movements into level, slope and curvature. The third covers trading applications, including curve trades, butterflies, basis trades between cash and futures, swap spread trades, volatility positions, and the use of mortgage-backed securities as a source of convexity risk.
The book is practical rather than mathematical, and it explains why a trade is put on and what makes it work or fail, which is the part usually missing from textbooks. It dates from 2011, which means the LIBOR-based swap conventions it describes have been replaced by SOFR, the quantitative easing environment it discusses has come and gone, and the regulatory changes affecting dealer balance sheets and repo have altered several of the relationships it treats as stable. The analytical framework holds; the specific market conventions require updating.
Key takeaways 7
- Most rate trades are structured to isolate one exposure, and the work consists of hedging away the exposures the trader does not want.
- Carry and roll-down explain a large share of the return to holding a position, independently of any view on rate direction.
- Yield curve movements decompose into level, slope and curvature, and different macroeconomic forces drive each.
- Swap spreads reflect dealer balance sheet capacity and collateral conditions rather than pure credit risk.
- Mortgage-backed securities carry negative convexity, and hedging by their holders amplifies rate moves in both directions.
- Butterfly trades express views on curvature while remaining neutral to level and slope, which makes them the standard vehicle for relative-value positions.
- The repo market determines the financing cost of every leveraged rates position, so repo conditions constrain what trades are viable.
Who should read it
Analysts and investors moving into fixed income who want a working explanation of rate trades and their risks rather than a mathematical treatment.
Where it sits in the reference 2
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