CAPÍTULO II: FUNDAMENTO TEÓRICO
2.2. MARCO TEÓRICO
2.2.5. TIPOS DE SENSORES ELECTROQUÍMICOS
August 2014 © Dr. Enzo Mondello, CFA, FRM, CAIA
Classic relative value analysis attempts to combine the best of top-down and bottom-up approaches. – The goal is to pick the best sectors, find the best issues in those sectors, and select the issuers’ securities that best match the investor’s opinions of the markets.
There are seven methodologies: – Total return analysis
– Primary market analysis – Liquidity and trading analysis,
– Secondary trading rationales and trading constraints – Spread analysis
– Structure analysis
– Corporate curve analysis – Credit analysis
– Asset allocation/sector analysis
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Primary market analysis focuses on supply and demand for new issues. The expectation is that more supply will hurt spreads as demand is stretched over a larger number of issues. In contrast empirical evidence is that new supply in the corporate market has not hurt spreads.
Globalization is listed as the most important development in the primary corporate bond market
On the supply side, medium term notes as well as structured securities have become more popular. The primary motive is to satisfy a broad range of investor needs thereby lowering funding costs. Bonds with embedded options are scarce, the supply of long-dated maturities has declined, and credit derivatives have become more popular.
Relative-Value Methodologies for Global/Corporate Bond Portfolio
Management
August 2014 © Dr. Enzo Mondello, CFA, FRM, CAIA
Both short and long-term liquidity influence portfolio management decisions
Some managers are hesitant to purchase issues that are not liquid, such as smaller-sized issues, private placements, and non-local corporate issuers. Other managers see the lack of liquidity as an opportunity to earn higher yields. Liquidity varies with the economic cycle, credit cycle, yield curve shape, supply, and the season. In addition, shocks to the system can dry-up liquidity quite quickly
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Rationales for Secondary Market Trading
The secondary market trades seasoned issues while the primary market trades new issues The rationales for secondary trading are:
– Yield/spread pickup trades – Credit upside trades
– Credit defense trades – New issue swaps – Sector rotation trades – Curve adjustment trades – Structure trades
– Cash flow reinvestment
Constructing a secondary market trade simply means comparing the relative values and selecting the most attractive
Relative-Value Methodologies for Global/Corporate Bond Portfolio
Management
August 2014 © Dr. Enzo Mondello, CFA, FRM, CAIA
Yield/spread pickup trades: they account for most of the secondary trades that occur. The goal is to trade one security for another in order to improve the yield or spread.
Credit-upside trades: they occur when the manager buys a bond in anticipation of an upgrade in the issuer’s credit rating that is not already reflected in the bond price. Good credit analysis is required and are profitable in the crossover sector (from speculative grade to investment grade).
Credit-defense trades: they are important when the firm deteriorates. Investors increase credit quality in reaction to uncertainties arising from secular changes in a sector (or also due to a rating downgrade, mandated by the portfolio guidelines).
New issue swaps: they occur when managers rotate their portfolios into more current (and often larger) issues to improve liquidity
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Sector rotation trading: It is a strategy where the manager shifts out of a sector expected to underperform and into a sector expected to outperform (macro and micro sector rotation)
Yield curve adjustment trades are made to reposition a portfolio’s duration
– For example if investor believes that corporate spreads will narrow, with other rates remaining relatively stable, the investor may shift the portfolio’s exposure to longer duration issues in that specific sector
– In contrast, portfolio duration should be reduced when interest rates are anticipated to increase so as to minimize potential price declines
Relative-Value Methodologies for Global/Corporate Bond Portfolio
Management
August 2014 © Dr. Enzo Mondello, CFA, FRM, CAIA
Example:
Given the following bond portfolio and anticipated changes in interest rates, recommend whether to sell the CDS
or Treasury bonds and replace them with the XXX bonds if the only objective is to maximize short-term price appreciation Yield curve today Anticipated yield curve
2-year 4.7% 4.1%
5-year 5.2% 4.7%
30-year 5.5% 5.0%
Weight % Issuer Maturity Mod. Duration Eff. Duration Current portfolio
30% U.S. Treasury 2-year 2.8 2.8
40% YYY 5-year 4.2 4.2
30% CDS 30-year 12.3 2.8
Bond being considered for purchase
XXX 5-year 4.2 4.2
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Structure trades: they involve swapping into structures (e.g., callable, bullet, or put structures) that are expected to outperform based on projected movements in volatility and the shape of the yield curve
Cash flow reinvestment: this forces managers into the secondary market on a regular basis to reinvest any cash flows received as a result of coupon payments or maturities
Relative-Value Methodologies for Global/Corporate Bond Portfolio
Management
August 2014 © Dr. Enzo Mondello, CFA, FRM, CAIA
Often, a trading constraint for one portfolio manager can become a trading opportunity for another portfolio manager
Constraints of trading are:
– (1) Portfolio restriction prevent a portfolio from trading even when it is otherwise beneficial. For example, some funds prevent a portfolio manager from holding non-domestic bonds, or force managers to sell a security
immediately if it is downgraded. Thus, such securities can become very attractively priced to another manager who is not constrained.
– (2) “Story disagreement”: times, when there is little agreement about a security’s value often indicate an opportunity to take a position that may be very profitable if the manager turns out to be right
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– (3) Buy-and-hold strategies: can be dictated by accounting constraints or by the desire to curb portfolio
turnover. A buy-and-hold manager is often prevented from buying and selling even when it would be advantageous to do so.
– (4) Seasonality: There are slow periods during the year when dealers and portfolio managers are more focused on closing their books, preparing reports, etc. Trading is very light at these times of year and some securities can become very attractively priced.
Relative-Value Methodologies for Global/Corporate Bond Portfolio
Management
August 2014 © Dr. Enzo Mondello, CFA, FRM, CAIA
Spread Analysis
Spread analysis is a common tool for identifying profitable bond trades:
– When yield spreads are expected to narrow, the bond with the higher spread duration will outperform the bond with the lower spread duration
– If spreads are expected to widen, the bond with the lower spread duration should outperform
– If spreads are expected to remain stable, the bond with the higher yield will outperform the bond with the lower yield
Spread analysis can be done using: – Nominal spreads
– Static spreads
– Option-adjusted spreads – Swap spreads
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Swap spread analysis is a relatively recent tool for comparing fixed to floating-rate bonds
Example:
On January 1, 2001, an investor owns USD 10 million of GMAC 8.0% bonds due 2011. These bonds are trading at the bid side price of 145 basis points over the 10-year U.S. Treasury yield of 6.2%. Thus, the yield-to-maturity is 7.65% (6.2% + 1.45%). On the same date, a 10-year interest-rate swap has the following terms:
fixed rate 10-year Treasury + 95 basis points floating rate LIBOR flat
The investor is considering selling the GMAC bond to buy a 10-year floating rate GMAC bond that pays LIBOR + 30 basis points. Calculate the fixed rate GMAC bond’s spread over LIBOR and advise the investor on the trade.
Relative-Value Methodologies for Global/Corporate Bond Portfolio
Management
August 2014 © Dr. Enzo Mondello, CFA, FRM, CAIA
The major advantage to a swaps framework is that it allows managers to more easily compare securities across fixed- rate and floating rate markets. – This comparison cannot be done with traditional spread analysis tools.
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Mean-reversion analysis: The mean is the average spread over a defined period, usually one economic cycle. This analysis assumes the yield spread will return to its average historical value. Mean reversion implies a bond should be purchased when spreads are at historic highs as it assumes spreads will narrow and the price of the target bond will increase. The main drawback to mean-reversion analysis is to successfully predict when spreads will return to their historic values.
Quality spread analysis focuses on credit spread. It looks at spread between high and low-quality credits. Managers may decide to swap into lower quality debt in anticipation of an economic expansion, or swap into higher quality debt in anticipation of weak economic conditions. The spreads between the two levels of quality may help determine whether these swaps are attractive.
Relative-Value Methodologies for Global/Corporate Bond Portfolio
Management
August 2014 © Dr. Enzo Mondello, CFA, FRM, CAIA
Percent spread analysis examines the ratio of corporate yields to government yields for securities of similar duration. A contraction of corporate percent yield spreads is considered a risk for future underperformance of the corporate asset class.
– This methodology ignores other factors that determine attractiveness, including demand and supply, profitability, defaults, and so forth. It is more a derivative than an explanatory, or predictive variable.
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Structure Analysis
Structural analysis investigates the performance of the different structures – bullet, callable, putable, and sinking fund structures
The importance of structural analysis has declined as intermediate bullets have become the predominant bond type. Credit differentiation is often more important than the structural differences.
Callable structures usually provide 5 to 10 years of call protection before the issuer can exercise the option to refinance debt in a lower-interest rate environment. Typically, issuers pay an annual spread premium of 30-40 basis points to entice investors to buy callable bonds. As would be expected, callables underperform bullets in periods of declining interest rates due to the higher risk of call (negative convexity). In bear markets, callables often outperform as they have little risk of being called and they pay a spread premium.
Relative-Value Methodologies for Global/Corporate Bond Portfolio
Management
August 2014 © Dr. Enzo Mondello, CFA, FRM, CAIA
Bullet structures
– Front-end bullets (1 to 5 year maturities) are used by investors pursuing a barbell strategy. They want to gain an enhanced yield.
– Intermediate corporate bullets (5 to 12 year maturities) are extremely popular. Their durations are reasonably high and many investors find them attractive relative to longer-term credits.
– Longer-term credits include the most popular long-term security, the 30-year maturity. These longer-term securities provide high convexity, while only modestly increasing duration compared to intermediate-term bonds.
Sinking fund structures allow issuers to execute a series of partial calls prior to maturity. Investors use bonds with sinking fund structures to help protect against rising interest rates as a portion of the calls are mandatory. Thus, these bonds may outperform bullets and callables during periods of rising rates.
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Putables are bonds where investors have a put option to demand full repayment at par. Put structures provide
investors with a defense against sharp increases in interest rates. In addition, investors can choose to put a bond where the credit quality is deteriorating (assuming the issuer can meet the obligation).
Relative-Value Methodologies for Global/Corporate Bond Portfolio
Management
August 2014 © Dr. Enzo Mondello, CFA, FRM, CAIA
Credit Curve Analysis
Corporate curve analysis
Many portfolio managers opt to take credit risk in short and intermediate term maturities and to use government securities in long-duration buckets. Credit barbell strategy.
As the time to maturity lengthens, the credit curve for poorly rated securities is steeper than for investment-grade securities. That means the spreads widen with the time to maturity.
Credit curves change shape in response to economic cycles and the economic outlook
– When the market is worried about interest rates and general credit risk, spreads widen and the spread curve becomes steeper
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Example:
Which of the following portfolios reflect a credit barbell strategy? All portfolios have the same durations. 1 to 5 years 5 to 12 years Long
Portfolio Tr. Corp. Tr. Corp. Tr. Corp. A 0% 30% 25% 25% 20% 0% B 15% 15% 30% 20% 0% 20% C 30% 0% 30% 20% 10% 10%
Identify the economic environment in which portfolio A would be most likely to underperform portfolio B, and explain why
Relative-Value Methodologies for Global/Corporate Bond Portfolio
Management
August 2014 © Dr. Enzo Mondello, CFA, FRM, CAIA
Credit Analysis
Good credit analysis identifies credit upgrades and downgrades before market prices and credit ratings reflect the credit changes
However, such analysis requires detailed bottom up analysis of financial statements, corporate management and industry trends. – This takes time and is challenging as global privatization of assets creates a growing list of credits to analyze.
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Risks Associated with Investing in Bonds
Fixed-Income Valuation
Term Structure of Interest Rates
Yield Measures
Interest Rate Risk: Duration and Convexity
Credit Risk: Fundamentals of Credit Analysis
Managing Bond Portfolio
Content
Relative-Value Methodologies for Global
Corporate Bond Portfolio Management
Exchange Rate Risk: International Bond Investing
Managing Interest Rate Risk with Derivatives
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August 2014 © Dr. Enzo Mondello, CFA, FRM, CAIA
Potential Sources of Excess Return
Foreign bonds offer several potential sources of excess return for the fixed-income portfolio manager:
– Country market selection: This strategy identifies those countries that are going to produce above-average returns and overweights the portfolio in the assets of those countries. – The economic cycles of countries are not synchronized. A portfolio manager can still earn a return advantage over treasuries by moving his credit allocation from one country to another country.
– Currency selection: This strategy identifies and overweights those currencies that will appreciate relative to the domestic currency and underweights the portfolio in those currencies that will depreciate.
– Duration/yield curve management: This can be executed within each country, based on expectations for interest rates in each country.