Interest rate anticipation strategies, Financial Management

Active bond management depends on an economic scenario in order to forecast the movements of yield curve.

A portfolio manager skillfully builds a portfolio with risk exposures that are consistent with his prediction of movements with regard to term structure:

  • If the portfolio manager forecasts a downward parallel shift in the term structure, then he must ensure whether the managed portfolio is exposed more to the shift factor rather than benchmark ZSp > ZSB

  • If he forecasts that the slope of the term structure will be steeper or flatter, then in that case the exposure of the managed portfolio to the twist factor must be higher when compared to the benchmark Ztp > ZtB

  • If he forecasts that the curvature of the term structure changes its level of concavity, then he must make sure that the managed portfolio is more exposed to the butterfly factor than the benchmark.

In case the portfolio manager forecasts that there will be decline in spread of lesser quality bonds, then he must overweight those types of bonds and vice versa and other forecasts.

Thus, a number of ways are available to build bond portfolios along the lines described with regard to equities, such as:

  • The portfolio manager confirms that the basic statistics such as duration, convexities etc., of managed portfolio are consistent with his scenario.

  • He can utilize a risk model in order to ensure that he is taking the desired risk exposures.

  • He can make use of an optimizer to minimize any tracking error of his portfolio, which is subjected to constraints on risk factor exposures that are required to implement his active portfolio.

  • He can apply a full-fledged optimization technique to maximize the forecasted risk adjusted active return of the bond portfolio while having forecasts for the factor returns.

So, with such an increase in sophistication in building a portfolio, we have to move from a largely judgmental method to a more structured and quantitative method of bond management. 

Posted Date: 9/11/2012 2:33:17 AM | Location : United States







Related Discussions:- Interest rate anticipation strategies, Assignment Help, Ask Question on Interest rate anticipation strategies, Get Answer, Expert's Help, Interest rate anticipation strategies Discussions

Write discussion on Interest rate anticipation strategies
Your posts are moderated
Related Questions
Difference between mortgage bond and a debenture? A mortgage bond is a secured bond whereas a debenture is an unsecured bond.

The Central Bank is an authority responsible for monetary policy of its country. It regulates money supply and credit, issues currency, and manages exchange rate.

Concept and measurement of the cost of capital The evaluation of the worth of a long-term project suggests a certain norm or standard against which benefits are to be judged. R

It is a bond that does not give periodic interest payments. In spite of that, interest is added to the principal balance of the bond and is either paid at maturity or, at some poin

The straight value of a convertible bond is nothing but the value of a non-convertible bond having same characteristics. For example, assume that a company has tw


364-Day T-Bills The Government considered that it is important to develop government securities market for monetary control. It also had an intention to ensure that government'

Accounting to Budget: Accounting to budget is a commonly used term to describe how an organisation controls its accounting process. Typically, an organisation divides its re

Q. What do you mean by Credit policy? Credit policy: the credit policy of the concern in its dealing with the debtors and the creditors influencly consider the requirement of t

Rationale for Mergers Many of the motives behind mergers of firms are discussed hereunder: Growth Growth is the most general and important motive for mergers. Merging f