A Primer on Interest Rate Markets and RV – Part 2: Government Bonds

16 March 2022

Government bonds play a critical role in the global financial system and are among the most liquid and deep markets in the world. As an important defensive component of portfolios, government bonds offer a lower risk source of return with high liquidity. For investors willing to look beyond the conventional approach of buying and holding bonds, there are unique relative value opportunities available in government bond markets.

In this second part of a series of primers, we outline key introductory concepts in government bond markets for relative value (RV) investing. This note builds on Part 1, which covered more general concepts of yield curve risks, relative value analysis of curves and provided examples of common trading strategies.

Our primers assume only a limited background in fixed income. We deliberately avoid detailed technical descriptions on the mechanics of instruments and risk measurements.

The following areas are covered in this primer:

  • Basic features of government bonds
  • Bond yield curves and issuance
  • Repo and carry
  • Bond vs swap spreads and RV
  • Bond futures and RV
  • Detailed RV examples
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