Active Fixed Income and Credit Management by F. Hagenstein, Tim Bangemann

By F. Hagenstein, Tim Bangemann

The authors give you the reader with an intensive software set for lively and profitable administration of fastened source of revenue portfolios in addition to for credit. the point of interest of dialogue is on quantitative and, for credit, qualitative equipment of portfolio administration. those concepts should be hired for portfolio diversification and with a purpose to outperform the benchmark. tools acceptable for various hazard components - period, yield curve, foundation, volatility and credits administration - are illustrated intimately utilizing a top-down and bottom-up strategy. numerous examples are provided to teach the sensible relevance of the theoretical versions and process.

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6 2y–5y–10y DEM/EUR swaps barbell: positive (negative) spread indicates 5y are cheap (expensive) Source: CSFB Germany: 5s - average 2s and 10s vs. 7 2y–5y–10y barbell vs. 10y yields: a certain market directionality is apparent (the increase in 10y yields leads to increased curvature): June 1998–July 2000 Source: CSFB 10y yld ld volat l Butterfly fl 2–5–10 ((SBS)) 25 15 20 10 % 5 5y underperf. 20 15 10 5 Sep–99 Dec–99 Mar–00 Jun–00 Sep–00 Dec–00 Mar–01 – 5 – 10 – 15 5y outperf. 6).

This means that a bond increases in value more as yields decrease, compared with the loss in value as yields increase. Convexity is therefore a desirable characteristic. Strips allow for the construction of strategies for given maturities with higher convexity than is possible using only conventional bonds. Strips can therefore profit from high volatility. This statement is true even though the convexity of strips is lower than the convexity of conventional bonds with the same duration, since a duration-neutral switch requires a larger amount of strips.

The pick-up for the cash-neutral barbell is greater. This feature should not lead to a preference in favour of the cash-neutral barbell rather than the twist-neutral barbell. The reason for the better pick-up stems from the fact that the cash-neutral barbell has a greater weighting in the 10-year bond. For a positively sloping curve it is true to say that a higher weighting in the 10-year issue than in the 2-year issue leads to a greater yield pick-up for the 2y–5y–10y barbell. Simultaneously this also means that the increasing weighting in the 5y–10y leg of the barbell incorporates a stronger curve-flattening position, which would lose value in a curve-steepening scenario.

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