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Bond Portfolio Management Strategies - Coggle Diagram
Bond Portfolio Management Strategies
1. Passive Management Strategies
Buy-and-Hold Strategy
Hold bonds until maturity
Focus on
Credit quality
Coupon rate
Maturity/duration
Reduce:
Price risk
Reinvestment risk
Uses bond laddering
Indexing Strategy
Mimic bond index performance
Example:
Barclays U.S. Aggregate Bond Index
Methods:
Full replication
Stratified sampling
Key concept:
Tracking error
Active Management Strategies
Interest Rate Anticipation
Predict future interest rate movement
Increase duration if rates expected to fall
Reduce duration if rates expected to rise
Valuation Analysis
Compare intrinsic value vs market price
Buy undervalued bonds
Sell overvalued bond
Credit Analysis
Analyze issuer default risk
Predict rating upgrades/downgrades
Focus on:
Financial ratios
Cash flow
Leverage
Management quality
Yield Spread Analysis
Study abnormal yield spread relationships
Sector swaps
Liquidity and volatility important
Bond Swaps
Pure Yield Pickup Swap
Offset capital gains with capital losses
Substitution Swap
Exploit temporary yield spread differencess
Tax Swap
Offset capital gains with capital losses
Core-Plus Management Strategies
Enhanced Indexing
Mostly passive with small active positions
Active/Passive "Plus" Sectors
Add higher return sectors
Example:
High-yield bonds
International bonds
Matched-Funding Strategies
Dedicated: Exact Cash Match
Match future liability natching
Dedicated: Optimal Cash Match
Lower cost liability matching
Classical Immunization
Protect portfolio form interest rate changes
Horizon Matching
Combine immunization + cash matching
Contingent & Structured Strategies
Contingent Immunization
Active management unless minimum return threatened
Structured Management
Use derivatives and structured products