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Bond Trading 1999 - Bond Portfolio Management

Bond Trading 1999 - Bond Portfolio Management - Bond...

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1 Bond Trading & Portfolio Management Jonathan Kinlay Jonathan Kinlay
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Copyright © 1999-2006 Investment Analytics Bond Portfolio Management Slide: 2 Bond Portfolio Management ± Role of debt in capital markets ± Risk-Return Characteristics of Bonds ± Key Bond Portfolio Management Tools ± Passive Bond Management ± The Impact of Taxes ± Bond Efficiency ± Tax Arbitrage ± Bond Portfolio Dedication & Improvement ± Building an After-Tax Yield Curve
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Copyright © 1999-2006 Investment Analytics Bond Portfolio Management Slide: 3 World Capital Markets Source: GP Brinson "Global Capital Market Risk Premia" US$ Bonds 20% Non-US$ Bonds 24% Cash 6% Property 7% US Equities 14% Non-US Equities 29% Venture Capital 0%
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Copyright © 1999-2006 Investment Analytics Bond Portfolio Management Slide: 4 Bond Markets by Currency Source: Salomon Brothers US$ 47% JPY 18% DEM 10% ITL 5% FFR CAN 2% GBP Other 11%
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Copyright © 1999-2006 Investment Analytics Bond Portfolio Management Slide: 5 US Debt Explosion The Explosion in US$ Debt, Inflation Adjusted 0 200 400 600 800 1000 1200 1400 1600 1800 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 Bi ll ions of 1982 U S$ Govts Mortgs Munis Corps
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Copyright © 1999-2006 Investment Analytics Bond Portfolio Management Slide: 6 Portfolio Management Overview ± Why do investors hold equities? ± Equities are risky ± BUT . . . ± Equities provide a risk premium
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Copyright © 1999-2006 Investment Analytics Bond Portfolio Management Slide: 7 Portfolio Theory & CAPM ± Portfolio Theory ± Equities are imperfectly correlated ± non-systematic risk ± Diversification improves the risk-return trade-off ± CAPM: investors should hold market portfolio
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Copyright © 1999-2006 Investment Analytics Bond Portfolio Management Slide: 8 Why Hold Bonds? ± Do bonds provide a risk premium? ± Do bonds have significant non-systematic risk?
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Copyright © 1999-2006 Investment Analytics Bond Portfolio Management Slide: 9 Evidence on Risk Premia in US Equity & Bond Markets: 1926-92 Average Rate of Return Average PORTFOLIO Nominal Real Risk Premium Stocks 12.4 9.2 8.6 Corp. Bonds 5.8 2.6 2.0 Govt. Bonds 5.2 2.0 1.4 T-Bills 3.8 0.6 - Source: Ibbotson & Sinquefield
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Copyright © 1999-2006 Investment Analytics Bond Portfolio Management Slide: 10 Are Bonds Much Less Risky than Stocks? (Jan 1985 - Dec 1992) Source: Ibbotson & Sinquefield Return Variability MARKET Stocks Bonds France 22.5 7.9 Germany 22.2 6.6 Switzerland 20.0 5.6 UK 19.6 9.5 US 16.6 10.5
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Copyright © 1999-2006 Investment Analytics Bond Portfolio Management Slide: 11 Do (riskless) bonds have significant non-systematic risk? ± What is “security specific” about a government bond? ± Two or three factors explain most (>95%) of variation in returns
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Copyright © 1999-2006 Investment Analytics Bond Portfolio Management Slide: 12 Risk Characteristics in Equities and Bonds Equities Bonds Market Risk 30% 95-99% Specific Risk 70% 1-5% Total 100%
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Copyright © 1999-2006 Investment Analytics Bond Portfolio Management Slide: 13 Implications for Portfolio Management ± STOCKS: ± Security Analysis ± Diversification ± BONDS ± Risk Management ± Tax
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Copyright © 1999-2006 Investment Analytics Bond Portfolio Management Slide: 14 Security Analysis ± EQUITIES ± Need to forecast future dividends
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  • Spring '09
  • Staff
  • Bond Portfolio Management, Investment Analytics Bond Portfolio Management, Investment Analytics Bond, Analytics Bond Portfolio

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