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发表于 2012-4-1 15:23
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Edward Justice, CFA, is an analyst for Sierra Funds (Sierra). Justice is investigating the use of relative value methodologies for global corporate bond portfolio management and needs assistance from several Sierra Fund managers and traders. He explains that relative value analysis involves comparing bonds and bond portfolios on characteristics such as sector, issue, and structure. He adds that firms may use a top-down or a bottom-up approach to the analysis. Sierra prefers a top-down approach.
Sierra manages an employee pension fund for Ice Dreams, Inc. (Ice Dreams). Sierra has been doing very little trading in Ice Dreams’ account and has avoided specific structures and foreign bonds entirely. Due to a recent increase in interest rates, there are several accounting losses in the portfolio at this time. Sierra traders have been getting conflicting advice from buy side and sell side analysts and at this point are unsure of the optimal trading strategies for the pension fund. Justin James, a Sierra trader, believes that it is a great time to trade. He suggests that trading out of telecommunications industy bonds and into pharmaceutical industry bonds may enhance returns in the Ice Dreams portfolio. He also believes that insurance industry bonds will see a ratings upgrade in the near future and is contemplating shifting a portion of the portfolio into insurance industry bonds.
Bond manager Mike Steere is interested in the implications of issues such as changes in dominant product structure and new issue supply for fixed-income portfolio managers. In an attempt to understand these issues, he asks Justice several questions. He is specifically interested in the implications of cyclical and secular changes for fixed-income portfolio managers.
Dan Baker is interested in the terminology related to different yield spreads. He states that swap spreads are the difference in the fixed and floating rates in a swap. Ashley Carlton, a Baker colleague at Sierra adds “the option adjusted spread is the spread on corporate securities after removing any embedded options when comparing them to mortgage-backed and U.S. Agency issues.”
Alexis Jones, a Sierra Funds bond trader is considering the following swap deal.- On January 1, 2001, TTT Corporate 7.0s of 2006 traded at a bid side price of 120 basis points over the 5-year U.S. Treasury yield of 6.20% at a time when LIBOR was 5.90%.
- On the same day, 5-year LIBOR-based swap spreads were at 100 basis points (to the U.S. Treasury).
- Assume that a bond manager bought the TTT issue and simultaneously enters into this 5-year swap.
Jones indicates that a key advantage of the swaps spread framework for evaluating corporate bond purchases is “the applicability of swap spreads across the quality spectrum.” William Greavey adds that another key advantage of the framework is “the convergence to a single spread standard derived from swap spreads. “ Both Jones and Greavey believe that the swaps spread framework is an important tool for traders and analysts alike when evaluating corporate bonds.Regarding yield spreads, Carlton and Baker are, respectively:
Carlton is correct about the OAS and Baker is incorrect regarding the swap spread. A swap spread is the spread paid by the fixed-rate payer over the rate on the on-the-run Treasury with the same maturity as the swap. The option adjusted spread is the effective spread for the class after removing any embedded options. (Study Session 9, LOS 24.e)
In answer to Steere’s queries, Justice is most likely to indicate that all of the following are implications of both cyclical and secular changes in the corporate bond market EXCEPT: A)
| securities with embedded options will command a premium price due to their scarcity value. |
| B)
| effective duration and aggregate interest-rate risk sensitivity will increase. |
| C)
| asset/liability managers with long horizons may be willing to pay a premium for long-term bonds. |
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Secular changes show that bullet and intermediate structures dominate the corporate bond market. Implications associated with these product structures:- Securities with embedded options will command a premium price due to their scarcity value.
- The percentage of long-term issues will decline. Thus, effective duration and aggregate interest-rate risk sensitivity will decline. Asset/liability managers with long horizons may be willing to pay a premium for long-term bonds.
- Credit-based derivatives will become increasingly used to achieve desired exposure to credit sectors, issuers, and structures.
(Study Session 9, LOS 24.b)
Regarding a swaps framework to evaluate corporate bond purchases, Jones and Greavey are, respectively:
Jones is incorrect and Greavey is correct. Many market practitioners expect a worldwide convergence to a single spread standard derived from swap spreads. Swap spreads facilitate the comparison of securities across fixed-rate and floating-rate markets, particularly for investment-grade securities. On the negative side, individual investors may not understand swap spreads and they are not applicable across the entire quality spectrum. (Study Session 9, LOS 24.e)
In the trade Jones is considering, the fixed rate corporate bond's spread over LIBOR would be closest to:
The fixed rate corporate bond's spread over LIBOR would be:| Receive from BSC (6.20% + 120 bp) | 7.40% |
- pay on swap (6.20% + 100 bp) | 7.20% |
+ receive from swap | LIBOR |
Net | LIBOR + 20 bp |
(Study Session 9, LOS 24.e)
Justice is contemplating the differences between callable bond and bullet bond strategies. Which of the following statements does NOT accurately describe the relationship between callable bonds and bullet strategies? Callables: A)
| outperform bullets when rates increase due to positive convexity. |
| B)
| do not fully participate when bond markets rally due to the "resistance" level set by the call price. |
| C)
| outperform bullets in bear bond markets because the probability of an early call diminishes. |
|
Callable bonds:- Underperform bullets when rates decline due to their negative convexity.
- Do not fully participate when bond markets rally due to the "resistance" level set by the call price.
- Outperform bullets in bear bond markets because the probability of an early call diminishes.
(Study Session 9, LOS 24.e)
James’ trading strategies regarding telecommunications and pharmaceutical industry bonds, and with respect to insurance industry bonds are, respectively: A)
| structure trades; credit defense trades. |
| B)
| sector rotation trades; credit upside trades. |
| C)
| yield/spread pickup trades; credit upside trades. |
|
The first trade that James describes, swapping out of telecommunications bonds and into pharmaceutical bonds because of a belief that the pharmaceutical bonds will perform better, is known as a sector rotation trade. Expecting insurance company bonds to be upgraded, and trading on that expectation, is known as a credit-upside trade. (Study Session 9, LOS 24.d) |
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