Fixed income is the largest market in the world by dollar volume — over $100 trillion outstanding globally. Yet it's structurally different from equities: most trading is OTC rather than exchange-based; pricing is by yield rather than price; the participant landscape is dominated by institutions rather than retail. Understanding fixed-income trading is essential for any analyst working with rates, credit, or macro.
Primary vs secondary markets
- Primary market: governments and corporates issue new bonds via auctions (governments) or syndicated bond issuances (corporates). CBK Kenya conducts weekly T-bill auctions and monthly T-bond auctions.
- Secondary market: previously-issued bonds trade between holders. Almost always OTC (dealer-to-dealer or dealer-to-customer) rather than on exchanges. Volume in secondary far exceeds primary on most days.
The yield curve
The yield curve plots government bond yields across maturities — typically 1m, 3m, 6m, 1y, 2y, 5y, 10y, 30y. The shape tells you what the market expects:
- Normal (upward-sloping): long-term yields > short-term yields. Healthy growth expected.
- Flat: similar yields across maturities. Uncertain outlook.
- Inverted: short-term yields > long-term yields. Recession-signal historically — markets expect rate cuts ahead.
- Steep: large gap between short and long yields. Either strong growth expected, or term premium is rising due to fiscal concerns.
Kenya's yield curve and what it means
Kenya's curve in 2025-26 has been quite flat to slightly inverted on the short end. CBK policy rate elevated to control inflation and support the shilling; long-term T-bond yields high (12-16%) reflecting fiscal pressure rather than growth expectations. A useful interpretation: the curve says 'we expect rates to fall as inflation moderates, but fiscal risk demands compensation.' Reading curves is the first analytical exercise every fixed-income trader does each morning.
Repo — the plumbing of fixed-income trading
A repurchase agreement (repo) is a secured short-term loan where the borrower sells securities to the lender today with an agreement to repurchase at a higher price the next day (or week, month). Economically, it's a collateralised loan: the securities are the collateral; the price gap is the interest. Repo markets allow:
- Bond traders to fund their positions overnight — buy a 10-year bond, repo it for cash to fund the purchase, hold the bond, collect coupons, profit if yields fall.
- Bond holders to earn yield on idle bonds (lending them via repo).
- Central banks to manage liquidity (CBK's open-market operations are essentially repo transactions).
- Short sellers to borrow bonds (reverse repo) and sell them, expecting to buy them back lower.
Carry trade — the foundation of fixed-income return
If a 10-year Kenyan T-bond yields 14% and overnight repo costs 11%, a trader can borrow at 11% to buy the bond at 14% — a 3-point 'carry'. As long as yields don't rise (which would cause the bond's price to fall and create a mark-to-market loss exceeding the carry), the position is profitable. Carry trades are the bread-and-butter of fixed-income desks. The risk: yields rise, the carry reverses, and the trader takes both higher funding cost and capital loss. The 'turn-of-the-curve' moment is when carry traders blow up.
Trading credit vs trading rates
Two main flavours of fixed-income trading: rates (government bonds, where credit risk is minimal and the focus is on duration and yield-curve dynamics) and credit (corporate bonds, where credit risk is the main driver and spreads matter more than yield levels). Different skills, different teams, different infrastructure. Most large banks split them.
Exercise
Kenya's CBK has just cut its policy rate by 50 bps. Walk through the likely market reaction across: (1) overnight repo rate; (2) 91-day T-bill yield; (3) 10-year T-bond yield; (4) commercial bank lending rates; (5) NSE banking-sector stocks.