Active Bond Portfolio Strategies
Fixed-Income Analysis
Lectures 8 and 9: Active Bond
Portfolio Strategies
Joëlle Miffre
1
Active Bond Portfolio Strategies
Market Timing: Trading on Interest Rate Predictions
Riding the Yield Curve
Timing Bets Based on Interest-Rates Level
When Rates are Expected to Decrease
When Rates are Expected to Increase: Roll-Over Strategies
Bets on Specific Moves of the Yield Curve
Barbell, Bullet, Ladder, Butterfly
Other Semi-Hedged Strategies: Ladder Hedged against Slope Movement
Active Fixed-Income Style Allocation Decisions
Bond Picking: Trading on Market Inefficiencies
Pure arbitrage opportunities
Speculative arbitrage opportunities
2
1
Active Strategies
Investors who do not accept the EMH pursue active investment strategies Pursuit of an active strategy assumes that investors possess some advantage relative to other market participants
Superior information
Superior analytical or judgment skills
Ability or willingness to do what other investors are unable to do
Two types of active strategies
Market timing (trading on interest rates predictions)
Bond picking (trading on market inefficiencies)
3
Market Timing
Portfolio managers are making bets on changes in the Treasury yield curve
Bets based on no change in the yield curve (riding the yield curve)
Bets on changes in interest rate level (e.g., roll-over strategies)
Bets based both on level, slope and curvature moves of the yield curve
(butterflies)
Managers need scenario analysis tools to estimate the return and the risk of implemented strategies
Evaluation of break-even point from which the strategy will start making or losing money
Assessment of the risk that the expectations are not realized
4
2
Timing Bets on No Change in the Yield Curve or “Riding the Yield Curve”
Riding the yield curve is a technique that fixed-income portfolio managers traditionally use in order to enhance returns
When the yield curve is upward sloping and is
Lectures 8 and 9: Active Bond
Portfolio Strategies
Joëlle Miffre
1
Active Bond Portfolio Strategies
Market Timing: Trading on Interest Rate Predictions
Riding the Yield Curve
Timing Bets Based on Interest-Rates Level
When Rates are Expected to Decrease
When Rates are Expected to Increase: Roll-Over Strategies
Bets on Specific Moves of the Yield Curve
Barbell, Bullet, Ladder, Butterfly
Other Semi-Hedged Strategies: Ladder Hedged against Slope Movement
Active Fixed-Income Style Allocation Decisions
Bond Picking: Trading on Market Inefficiencies
Pure arbitrage opportunities
Speculative arbitrage opportunities
2
1
Active Strategies
Investors who do not accept the EMH pursue active investment strategies Pursuit of an active strategy assumes that investors possess some advantage relative to other market participants
Superior information
Superior analytical or judgment skills
Ability or willingness to do what other investors are unable to do
Two types of active strategies
Market timing (trading on interest rates predictions)
Bond picking (trading on market inefficiencies)
3
Market Timing
Portfolio managers are making bets on changes in the Treasury yield curve
Bets based on no change in the yield curve (riding the yield curve)
Bets on changes in interest rate level (e.g., roll-over strategies)
Bets based both on level, slope and curvature moves of the yield curve
(butterflies)
Managers need scenario analysis tools to estimate the return and the risk of implemented strategies
Evaluation of break-even point from which the strategy will start making or losing money
Assessment of the risk that the expectations are not realized
4
2
Timing Bets on No Change in the Yield Curve or “Riding the Yield Curve”
Riding the yield curve is a technique that fixed-income portfolio managers traditionally use in order to enhance returns
When the yield curve is upward sloping and is