Fed Up! Glossary

A Beginner’s Companion to Macro Terms

Liquidity and Overnight Rates

Liquidity

• How easily an asset can be turned into cash without moving price much

• Company liquidity = ability to meet near-term obligations

• Zero liquidity = buyers disappear / spreads blow out / trading freezes

Repo market

• A secured short-term loan: borrower sells securities and agrees to repurchase later

• Common collateral: U.S. Treasuries (most common), agency debt, agency MBS, sometimes corporates/equities (with bigger haircuts)

• Provides leverage: borrow cash against high-quality collateral with small haircuts, scaling positions bigger than equity

• Reverse repo is the lender’s perspective

Overnight market & overnight rates

• Markets where institutions borrow/lend cash overnight to manage daily funding needs

• Important U.S. benchmarks: Fed funds (policy target), SOFR (secured overnight rate from Treasury repo transactions)

Why does liquidity matter

• Liquidity shortages can cause payment failures, forced selling, credit contraction, rate volatility, and systemic stress - sometimes even if institutions are “solvent”

Fed, QE/QT, and Balance Sheets

The Fed

• U.S. central bank

QE (quantitative easing)

• Fed buys Treasuries/MBS, paying by creating bank reserves electronically

• Goal: add liquidity, lower longer-term yields, improve market function, ease financial conditions

• QE mostly begins as an asset swap (private sector holds more deposits/reserves, fewer bonds); real-economy impact is typically indirect

Where the “money” comes from in QE

• The Fed creates reserves (central bank money), not “tax money.” Mostly digital, not paper cash

Fed balance sheet mechanics

• Balance sheet “gets bigger” when Fed adds assets (bonds) and creates matching liabilities (reserves)

• Net/capital can stay the same even as the balance sheet expands (assets↑ and liabilities↑ together)

Balance sheet reduction (QT)

• Fed shrinks holdings by letting securities mature without reinvesting (main method) or selling outright (less common)

• Typically drains reserves/liquidity, can tighten conditions and pressure yields higher (all else equal)

Fed “dots”

• “Dot plot” = policymakers’ projected path of policy rates

• Higher dots = more hawkish (higher expected rates)

• Higher expected rates → bonds repriced lower → yields rise (price↓, yield↑ mechanics)

Bonds, Yields, Spreads, and Yield Curve

Yield

• Return expressed as a percent; for bonds, price and yield move inversely

• Current yield = coupon / market price

• Yield-to-maturity (YTM) includes coupon + pull-to-par gain/loss

Face value (par)

• Amount repaid at maturity (e.g., $1,000)

Spread

• Difference between two rates/prices (yield spread, bid-ask spread, credit spread)

• Wider spreads often signal higher risk or worse liquidity

Yield curve

• Plot of yields by maturity (e.g., 3m, 2y, 10y, 30y)

• Inversion = short yields > long yields; often signals expectations of slowing growth and future cuts (not perfect timing tool)

Curve moves

• Steepening = long–short yield gap widens; flattening = gap narrows

• Bull steepening = yields fall overall, short end falls more (often rate cuts expected)

• Bear steepening = yields rise overall, long end rises more

“Long steepener”

• Position structured to profit if curve steepens (e.g., long short-end duration / short long-end duration; or receive front-end swap, pay long-end swap)

Bonds and interest rates

• When rates/expected rates rise, existing lower-coupon bonds look less attractive → selling pressure → prices fall, yields rise

U.S. Treasuries

• T-bills: no coupon (discount instruments)

• Notes/Bonds: fixed coupons paid semiannually

• TIPS: inflation-linked principal and payments

Credit & Crisis-Era Terms

Corporate bond yield & credit spreads

• Corporate yields = Treasury yield + credit spread

• Spreads widen with “risk-off,” recession fears, liquidity stress; tighten when confidence rises

Investment grade vs high yield

• IG (BBB-/Baa3 or higher): lower risk/lower yield

• High yield/junk: higher default risk/higher yield

Fallen angels

• Bonds downgraded from IG → HY; can trigger forced selling and dislocations

Subprime mortgages & CDOs

• Subprime = mortgages to riskier borrowers (higher rates)

• CDO = pooled debt sliced into tranches (senior/mezz/equity), central in GFC amplification

TARP

• U.S. Treasury program (2008) to stabilize system via capital injections/asset relief

TALF

• Fed program to revive ABS markets by lending against asset-backed securities

Minsky moment

• Crash/unwind after a debt-fueled boom; leverage + forced selling accelerates collapse

Quant quake (2007)

• Crowded quant/factor trades unwound simultaneously; liquidity + leverage amplified losses

Derivatives & Volatility

Options

• Right, not obligation: calls (buy), puts (sell); buyer pays premium, seller collects premium with potentially large risk

Futures

• Exchange-traded obligation to buy/sell later; margin + daily mark-to-market

Swaps (especially interest rate swaps)

• Exchange fixed vs floating cash flows; commonly provided by banks/swap dealers; often cleared now

• Used heavily by corporates, banks, hedge funds, pensions

Volatility market

• Volatility traded primarily via options, VIX products, swaptions, variance swaps

Selling volatility

• Selling options to collect premium; benefits if realized volatility < implied; tends to have small steady gains + occasional large losses

Greeks

• Gamma: how fast delta changes (convexity)

• Theta: time decay

• Vega: sensitivity to implied volatility

VIX

• Market’s expected ~30-day S&P 500 volatility from option prices (“fear gauge”)

Market Participants & Vehicles

Buy side vs sell side

• Buy side: asset managers, hedge funds, pensions - invest money for returns

• Sell side: banks/brokers - make markets, provide liquidity, earn spreads/fees

• “Make a market” = quote bid/ask continuously; earn spread, manage inventory risk

Prop trading & proprietary risk

• Trading a firm’s own balance sheet; risk borne by the firm

• Warehouse position = dealer temporarily holds inventory risk while distributing/hedging

Pension funds

• Invest long-term to meet future liabilities; strong focus on asset-liability management

Private equity / private securities

• Investing in non-public companies or private debt; illiquid, long horizon

ETFs

• Trade like stocks; provide basket exposure

• Mentioned examples:

  • QQQ (Nasdaq-100 equity exposure)

  • LQD (investment-grade credit)

  • HYG/JNK (high-yield credit)

  • EWZ (Brazil equity exposure)

13F

• SEC quarterly holdings disclosure for large managers (long U.S. equities/13F list items; not shorts; delayed)

Common Trading Language & Macro Phrases

Sell-off = sharp decline from heavy selling; rally = sharp rise

Trim position / scaling out = reduce exposure in pieces; lock profits / reduce risk

Hit target = reached planned take-profit level

Weak hands = holders likely to panic-sell; “flush” = forced exit

Front-run

• Can mean illegal misuse of client info; also used loosely for legal “anticipatory trading” based on public flows

Variant view

• A differentiated view vs consensus; profits come from being right and different

Green shoots

• Early signs of recovery after downturn

Global growth scare

• Markets suddenly price broad slowdown risk (risk-off: equities down, bonds up, spreads wider, commodities down)

Dollar weakness / Dollar Index (DXY)

• USD falling vs a basket; impacts commodities, EM, and global risk positioning

“Reds and greens”

• Slang for parts of the short-rate futures strip (rate expectations 2–3 years out)

“Termed out” funding

• Replacing short-term funding with longer-maturity funding to reduce rollover risk

This glossary is meant as a practical, plain-English guide to common macro and market terms. Definitions are simplified for clarity, and some entries include general market context or historical shorthand rather than full technical treatment.