It was the third week of August 2003, and Jamil Baz, head of Deutsche Bank's Fixed Income Research Group, gathered his research group for a morning meeting. “So, what are the markets telling us today?” he asked the group. “Are there any trends or news for new trade ideas?”
The Fixed Income Research Group that Baz led was Deutsche Bank's internal research and development (R&D) department for fixed income instruments. Their mandate was to look for untapped value across bond markets and interest rate derivatives. Long-term-oriented research findings were presented to clients, whereas immediate opportunities were suggested as trades to internal traders as well as clients. The success of the group was in part measured by how many of their trade suggestions actually turned into successful trades. So far, they had achieved an impressive 75% success rate.
A natural place to start looking for new trades was the latest prices on various U.S. Treasury bonds (see Exhibit 1 for data from August 15, 2003). The group's members consistently went through that data set, looking for possible trades to recommend. Typically relative-value trades took both long and short positions across different parts of the yield curve. Baz's standard weekly question just emphasized what they all knew: that it was time to scour through the numbers one more time to see if any such positions were available.
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