"Surely a lot of bonds are listed on exchanges and traded electronically. Everything about a bond is quantifiable and perfect for inputting into trading models."
With the exception of so-called current US Treasuries (and their sovereign equivalents), almost all bonds are comparatively illiquid. Transactions are done in large blocks between trading desks and institutional clients. Spreads are a few basis points. Thus with the exception of current treasuries, automation is not really an option.
The statement that ""Everything about a bond is quantifiable and perfect for inputting into trading models." is true, but exceedingly simplistic. Even the simplest callable bond has an embedded long option that is extremely difficult to meaningfully value despite the determinate characteristics of that option.
In the case of CDO's, the embedded options exhibit rate-sensitive prepayment characteristics.
In the case of all fixed income-related options, long and short interest rates, thus the structure of the yield curve, are involved on many levels, e.g. the discount rate for calculating the option, but also the rate driving the price of the underlying bond.
Nothing that a few Crays can't handle, but still, the numbers that come out are pretty weak. You have I believe heard about some difficulties which arose concerning the pricing of CDO's?
