Fixed Income Trading: The Definitive Guide to Understanding Bonds and Securities

Fixed income is the largest and least visible part of the capital markets. Equities get the headlines; bonds carry the financing of governments, companies, banks and housing. For anyone working in, or hiring into, a UK fixed income business — a bank trading desk, an asset manager, a credit fund, a broker or an insurer’s investment team — understanding how the market actually functions matters more than memorising instrument definitions.

This guide covers the sterling market as it works in practice: what is issued and by whom, how bonds are priced, how they change hands, the rules that now govern transparency, the risks that cause real damage, and the people who make a fixed income business work — from traders and credit analysts to the heads of desk and risk leaders who run them. It is an educational overview of how the market operates, not investment advice.

What fixed income covers in the UK

A bond is a loan in tradeable form. The issuer borrows a principal sum, agrees to pay interest (the coupon) on a set schedule, and promises to repay the principal on a fixed date. Because the payments are contractually defined in advance, the asset class is called fixed income — although, as anyone who held long-dated gilts in 2022 will confirm, the market value of those payments is anything but fixed.

Sterling fixed income divides into four broad issuer groups, and each behaves differently:

• Gilts — UK government bonds, the reference point for every other sterling yield.
• Sterling corporate credit — bonds from UK and international companies, split by credit rating into investment grade and high yield.
• Supranationals, sovereigns and agencies (SSA) — development banks, other governments and public bodies borrowing in sterling.
• Securitised and structured credit — residential and commercial mortgage-backed securities, asset-backed paper and collateralised loan obligations.

The buyer base matters as much as the issuer base. Defined benefit pension schemes are natural holders of long-dated and index-linked gilts because their liabilities are long and inflation-linked. Insurers hold large sterling credit portfolios to match annuity liabilities. Asset managers run active and index mandates across the curve, banks hold gilts for liquidity and make markets, and hedge funds trade relative value, macro and credit strategies, often with leverage. That concentration of long-dated, liability-driven demand is one reason the sterling curve behaves differently from the dollar or euro curves.

Gilts: how the UK government borrows

Gilts are sterling liabilities of the UK government, issued by HM Treasury and listed on the London Stock Exchange. The UK Debt Management Office runs the issuance programme on the Treasury’s behalf, mainly through auctions, with syndicated offerings used for some longer and index-linked issues. Two types dominate:

• Conventional gilts pay a fixed coupon in two equal semi-annual instalments and return principal at maturity. They make up the larger share of gilts in issue and are quoted per £100 nominal.
• Index-linked gilts adjust both coupon and principal for UK RPI inflation, with a lag. They are the minority of the stock but sit at the centre of pension scheme hedging.

Gilts do more than fund the state. They are the benchmark against which sterling corporate bonds are priced, the main collateral in the sterling repo market, and the channel through which Bank of England policy reaches the wider economy. A dedicated group of banks, the Gilt-edged Market Makers (GEMMs), act as primary dealers: they participate in issuance and are expected to quote two-way prices to clients. Anyone moving into a rates role learns the gilt calendar, the auction process and the GEMM structure early.

Corporate, SSA and securitised credit

Corporate bonds pay a spread over gilts to compensate investors for the risk that the issuer does not pay. That spread moves with the issuer’s fortunes, its rating, its sector and the general appetite for risk. The rating agencies divide the market into investment grade and high yield, and many institutional mandates are restricted to one side of that line, which is why a downgrade across the boundary can trigger forced selling.

The sterling corporate market is smaller and less liquid than its dollar and euro equivalents. Position sizes and exit assumptions that work in dollars do not always carry across, and that is a practical constraint for portfolio managers and traders alike. SSA paper generally trades as high-quality, liquid credit. Securitised and structured credit is a specialist corner with its own modelling of prepayment, default and cash-flow waterfalls — and its own, fairly small, talent pool.

Pricing, yield and duration

Price and yield move in opposite directions

The single most important mechanic in the asset class is the inverse relationship between price and yield. A bond’s cash flows are fixed, so when market yields rise, those cash flows are worth less and the price falls; when yields fall, the price rises. Current yield is simply the coupon divided by the price. Yield to maturity is the single discount rate that equates all remaining cash flows to today’s price, and it is the standard way to compare bonds with different coupons and maturities.

For credit, the yield is usually broken into two parts: the gilt yield for the equivalent maturity, and the credit spread above it. New corporate issues are priced the same way, with the lead banks building a book of orders and setting the spread over a benchmark gilt.

Duration and convexity

Duration measures how sensitive a bond’s price is to a change in yield. As a rule of thumb, a bond with a modified duration of eight will lose roughly eight per cent of its value for a one percentage point rise in yields. Longer maturities and lower coupons both increase duration, which is why long-dated index-linked gilts are among the most rate-sensitive instruments in the sterling market. Convexity captures the curvature in the price–yield relationship; it barely matters for small moves and matters a great deal for large ones.

Embedded options

Callable bonds let the issuer redeem early, usually when rates have fallen, which caps the investor’s upside. Puttable bonds give the holder the right to sell back early. Convertibles can be exchanged for equity on set terms. Each changes the risk profile in ways a headline yield comparison will miss, and structurers and quantitative analysts spend much of their time modelling exactly these features.

How bonds actually trade

Unlike shares, most bonds do not trade on a central exchange order book. They trade over the counter (OTC), with dealers standing between buyers and sellers. That structure shapes almost everything about how a fixed income desk works.

• Primary market. Gilts come to market through DMO auctions and syndications. Corporate issues are underwritten and distributed by a syndicate of banks to institutional investors through a bookbuilding process.
• Dealer-to-client trading. In the secondary market, banks and broker-dealers quote bid and offer prices and hold inventory on their balance sheet. A benchmark gilt trades continuously in size; a small corporate issue may not trade for weeks.
• Electronic platforms. Request-for-quote and multilateral trading platforms have taken a growing share of government bond and liquid credit trading, improving price discovery and cutting execution costs. Voice trading persists where size, complexity or illiquidity call for it.
• Inter-dealer brokers. Dealers lay off and rebalance risk with each other through brokers, often anonymously.
• Repo. Bonds are lent against cash on a short-term secured basis. Repo funds leveraged positions and dealer inventory, and it is usually where liquidity stress shows up first.

Retail access has also changed. The London Stock Exchange’s Order book for Retail Bonds (ORB) has been folded into its Order Book for Fixed Income Securities, where retail-eligible bonds trade with market-maker support. The practical point for professionals is unchanged: institutional liquidity sits overwhelmingly in the dealer market, and the skills of a fixed income trader are built around pricing, inventory and relationships rather than an exchange screen.

Liquidity dispersion — the gap between the most and least traded instruments — is the defining practical reality of fixed income. It is what most textbook treatments understate, and it is the first thing an experienced head of desk tests when interviewing a trader.

Transparency and regulation in 2026

Since leaving the EU, the UK has been reshaping the onshored MiFID II and MiFIR framework for wholesale markets. For bonds, three developments matter most.

A new bond transparency regime. The FCA’s PS24/14 rules on bond and derivatives transparency came into force on 1 December 2025. They narrow public trade reporting to bonds admitted to trading on a UK venue, replace the old liquidity calculations with simpler proxies, and introduce three deferral periods for post-trade publication, calibrated by trade size.

A UK bond consolidated tape. The FCA appointed Etrading Software as the bond consolidated tape provider, with launch planned for June 2026, and the tape has since gone live. It gives the market a single feed of post-trade bond data — a meaningful change in a market where price transparency has historically depended on whom you could call.

Benchmarks, prudential rules and accountability. Sterling LIBOR has been replaced by SONIA for floating-rate instruments. Prudential rules for banks and insurers sit with the PRA, and investment firms fall under the FCA’s MIFIDPRU regime, which shapes how trading positions are capitalised. The Senior Managers and Certification Regime puts named individuals in charge of defined responsibilities, so senior desk, compliance and risk appointments at regulated firms carry an approval step that has to be planned into any hiring timetable.

The risks that matter, and the 2022 lesson

Fixed income risk is usually listed as interest rate, credit, liquidity, inflation, reinvestment and counterparty risk. All are real. The one that UK institutions learnt about most painfully is the interaction between hedging and collateral.

After the fiscal statement of 23 September 2022, long-dated gilt yields rose at a pace with no recent precedent. Many defined benefit schemes used leveraged liability-driven investment (LDI) strategies to hedge interest rate and inflation exposure. As yields rose, those hedges generated collateral calls faster than schemes could meet them, and forced gilt sales pushed yields higher still. The Bank of England stepped in on 28 September with temporary purchases of long-dated gilts, later extended to index-linked gilts, and closed the programme on 14 October; its Quarterly Bulletin case study sets out the sequence in detail.

The lesson reaches well beyond pensions: a hedge that works on a mark-to-market basis can still fail on a liquidity basis. Duration was managed; the cash consequence of managing it was not. The episode has shaped how UK firms think about liquidity buffers, stress testing and operational readiness, and it remains a useful reference point when assessing risk and trading candidates.

Who works in a fixed income business

Whether the business is a bank’s markets division, a broker or a buy-side investment team, the functions divide fairly cleanly:

• Traders. On the sell side, traders make prices, manage inventory and run risk within limits. On the buy side, they execute the portfolio manager’s decisions and source liquidity. Judgement under pressure, demonstrated across a full cycle, is the defining requirement.
• Sales. Salespeople own client relationships with pension funds, insurers, asset managers and hedge funds, bringing flow to the desk and market colour to clients.
• Structurers. They design bespoke solutions — structured notes, securitisations, liability hedges — and need equal fluency in mathematics, documentation and client needs.
• Credit analysts. They form views on issuer default risk and relative value. The ones who progress are those whose calls are acted on rather than filed.
• Quantitative analysts. They build curve, pricing and relative value models, and compete for talent with technology firms as much as with other banks.
• Heads of desk. They own the P&L, risk appetite, client franchise and team for a product area such as rates, credit or securitised products, and they are the bridge between the desk and senior management.
• Risk, operations and compliance. Independent risk oversight, settlement and collateral management, transaction reporting, best execution and market abuse surveillance — the control functions that institutional clients now examine closely.

Above the desks sit the markets leadership roles: global or regional heads of fixed income, chief investment officers on the buy side, chief risk officers and the senior managers who hold regulatory responsibilities. Many of the same skills transfer between rates, credit and adjacent markets such as FX, which is why trading leaders often move between asset classes during a career.

Hiring fixed income and markets leadership

Senior hiring in this market rarely fails on technical knowledge. Plenty of candidates can explain duration and convexity. The harder questions are about judgement, franchise and control. A few observations from financial services executive search work in this space:

• Cycle experience is scarce. Many fixed income professionals built their careers in a long period of falling rates. Those who have run a book through a genuine rate shock, and can describe what they actually did rather than what the model said, are a smaller group.
• Portable franchise matters. For a head of desk or a senior trader, the question is not only skill but which client relationships and which flow will realistically follow them, given notice periods and restrictive covenants.
• Risk and control hires are commercial hires. A credible chief risk officer or head of compliance now affects whether allocators and counterparties will do business with the firm.
• Regulatory approval sits between offer and start. Where the role is a senior management function, the approval timetable needs to be built in from the outset rather than discovered after the offer.

Exec Capital works across the whole markets spectrum: heads of trading at brokers, chief investment officers and portfolio managers on the buy side, and senior leadership across investment banking. For permanent, interim and SMF-approved appointments, our financial services search practice combines market knowledge with an understanding of the regulatory steps that sit around each hire.

Frequently asked questions

What is fixed income trading?

It is the buying, selling and market-making of debt securities such as gilts, corporate bonds and securitised credit. Most of it happens over the counter between dealers and institutional clients, increasingly through electronic platforms.

Why do bond prices fall when interest rates rise?

A bond’s coupon is fixed. When new bonds offer higher yields, existing bonds are worth less, so their price falls until their yield matches the market. Duration indicates how large that fall will be.

Who issues gilts?

Gilts are issued by HM Treasury, with the UK Debt Management Office running the auction and syndication programme. Gilt-edged Market Makers act as primary dealers.

Is there a consolidated tape for UK bonds?

Yes. The FCA selected Etrading Software to run the UK bond consolidated tape, which launched in 2026 and publishes post-trade bond data in a single feed.

What does a head of fixed income desk do?

They own the desk’s P&L, risk appetite, client franchise and team for a product area, working within limits set by risk and senior management. At regulated firms, the most senior markets roles may also carry SMCR responsibilities.