Fixed Income Trading

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Fixed Income Trading
Investing and Hedging

• Overview of Bond Trading and Investing

• Fixed Income Trading

???????? ???????? (choteaps_at_bot.or.th)
15 ??????? 2550
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Overview of Bond Trading and Investing

• Framework ?????????????????????????
• ?????????????????????? ( Passive / Active )
• ??????????????????????????? Yield Curve

3
??????????????????????????
(Portfolio Management)

• ???????????????????????????
• ?????????????????????
• ?????????????????????????
• ???????????????????????
• ????????????????????????????

4
????????????????????
? ???????????????????? ? Passive
Strategies (Asset/Liability
Matching, Indexing, ??? Buy Hold) ?
Active Strategies (Interest Rate Expectation,
Yield Curve Strategies, Yield Spread Strategies,
???Security-Selection Strategies)
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????????????????????
Passive Strategies (Asset/Liability
Matching, Indexing ??? Buy
Hold) Active Strategies (Interest Rate
Expectation, Yield Curve Strategies,
Yield Spread Strategies, ???
Security-Selection Strategies)
????????????????????
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Passive Strategies
Active Strategies

• Definition
• Take View ?????????????????????????????
• ??????
• ??????????????????????????????????????????????????
  ?????????
• ?????????? Efficient Market Hypothesis
  (?????????????????????????????????????????????????
  ?????)
• ???????
• Transaction Cost ???
• ?????????????????????????? ???????????????????????
  ???????????????

• Definition
• ???????? Take View ?????????????????????????????
• ???????????????????????????????????
• ??????
• ??????? Efficient Market Hypothesis
• Low transaction Cost (only rebalancing)
• ??????????????????????????????????????????????????
  ?????????
• ???????
• ???????????????? Optimal Portfolio

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Benchmark VS. Investment Process
Returns are predominantly benchmark driven (90
of portfolio return, BIS 2004)
Multi-layer Strategic vs. Tactical
Goals/ Constraints/ Style
Management
Benchmark Framework
Market Views/ Investment Strategies
Deviation from Benchmark
Portfolio Manager
Investments in the markets
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Investment Universe
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Variety of Risk and Return Profiles
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The Efficient Frontier
The Efficient Frontier is the collection of all
efficient portfolios
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???????????????????? Passive ????????????? ?

• Pushing out of efficient frontier!
• Broaden Opportunity Set
• Maximizing Risk-adjusted return
• Disciplined risk budgeting

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??????????????????????????
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Yield Curve
(?????????????????)
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Yield Curve

• ??????????????????????????????????????????????????
  ??????????? ??????????????????????????????????????
  ????????????????????????????????
• ??????????? Yield Curve
• ?????????????????????????????????????????????????
• ????????????????????????? ???????????????????????
• ??????????????????????????????????????
• ?????????????????????????????????
• ??????????????????????????????????

Yield
Maturity
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????????? Yield Curve

• ??????????????????????? securities ?????????????
  yield curve ??????????????
• ??????????????
• Benchmark Yield Curve ???????????????????????????
  ? ???????? Maturity ??????????? 1 ???
  ????????????????????????????????????????? Curve
  ??????????????????????????????????????????????????
  ?????? maturity ????? ???????????????????????????
  ???????????????????????????????????????????
  (Off-the-run Papers)
• Par Yield Curve ???????? Yield
  ?????????????????????????????????? Par ???????
  Yield ??? Coupon Rate ??????????????? Coupon
  Curve ???????????????????????????????????????????
  ?????????????? Par ???

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????????? Yield Curve

• Option-Free Curve ????????????????? Benchmark
  Curve ????????? Off-the-run Bonds ???????? Par
  Yield Curve ???????????????????????
• ????????????????? Option ????????????? OAS
  (Option-Adjusted Spread)
• Zero-Coupon (Spot) Curve ??????????????
  Term-structure of Interest Rate
  ????????????????????? Coupon Bond ?????????????
  Bootstrapping. Zero-Coupon Curve
  ??????????????????? Implied Forward Rate
  ?????????????????????????????????????

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????? Theoretical Yield Curve ( Zero Yield Curve )
GIVEN Y1 .04 , Y2 .0415 FIND Y3
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Theoretical Spot Curve as Fair Market Curve
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Implied Forward Rate
??????????????????????? 2 ?????? 1.
??????????????????????? 1 ?? 2.
??????????????????????? 6 ?????
??????????????????????????????????????????????? 6
????????????????? ???????????????????????????????
?????? ???????????????????????????????????
??????????????????????????? ??????
???????????????????????????????? 6 ?????????? 6
??????????????????????????????????????????????????
??????? ???????? Rate ??????????? Forward
Rate ??????? Implied Forward Rate
??????????????????????????????????????????????????
???????????????????????????? (????????????????????
?? ? ????????)
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Implied Forward Rate
??????????????????????????????? 2
P(1y1)(1f)
?????????????????????????????? 1 ????????????????
2 P(1y1)(1f) 100
y2
y1
f
t0
t2
t1
nft Forward Rate n periods from now for t
periods
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Forward Curve Analysis
Source Bloomberg (FWCV)
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Forward Curve Analysis
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???????????????????????????? Yield Curve
??????????????????? Yield Curve ? ???????????
??? Forward Curve ?
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???????????????????????????? Yield Curve
CARRY ????????????????????????????????????????????
??????????? ???? ????????? Yield Curve
?????????????? (?????? Reinvestment Rate
??????) Rolling Yields ???????????????????????????
????????????????? ????????? Yield ???????????????
????????? Yield Curve ???????? Positive
Slope Yield Curve Change ????????????????????????
? Yield Curve ??????????? ???????????? Duration
??? Convexity
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???????????????????????????? Yield Curve
The First Two Components
Yield
Implied Forward Curve
Expected Return A. Carry B. Roll-down
C. ?
A
B
Maturity
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???????????????????????????? Yield Curve
The Last Components

• Expected Return
• A. Carry
• B. Roll-down
• Expected Capital Gain/Loss
• (Duration Convexity)

Expected Yield Curve
Yield
Implied Forward Curve
A
C
B
Maturity
Break-Even Point -gt AB C
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Value of Roll
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Total Return Component
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Horizon Return
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???????????????? Yield Curve

• ????????????????????????????? Time/Cashflows
  bucket ??? Yield Curve ??????????????
• Demand / Supply Investors Preferences
• ??????????????? Futures
• ?????????????????????????????????? Total Return
  ??????? ? ????????????? (Carry, Roll-down, Yield
  Curve Changes)
• ??????????????????????????????????????? Active
  
• ??? Forward Curve (???? Interest Rate Futures)
  ??????????????????????????????????????????????????
  ???????????????

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Fixed Income Trading

• ????????? Active Strategies
• Active Strategies ??????
• Duration Trades
• Yield Curve Trades
• Yield Spread Trades
• Active Strategies In Broader Perspective

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???????????? Active Strategies

• ??????????????????????????????????????????????
  Active Strategies ???? Alpha Source (Return
  Decomposition)
• ??????????????????????????????????????????????????
  ????????????????????????????????????

Market Efficient? Systematic Risk
What Are We Good At? Should We Diversify?
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Active Strategy ?????????

• Interest-Rate Expectation Strategy (Parallel
  Shift in Yield Curve)
• Yield Curve Strategy (Non-parallel Shift in Yield
  Curve)
• Yield Spread Strategy
• Security Selection Strategy

?????????????? 4 ????????????????????????
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Understanding Interest Rate Determinants
Macroeconomic Forecasts
Market Development
Monetary Policy

• CBs framework
• Style and confidence (Volatility)

• Consistency of Issuance
• Government Policies
• Understanding of Market Participants
• Structural factors

Duration
Fiscal Policy
Yield Curve

• Budget Condition and Supply (Bond Issuance)

Sector

• Credit (investment and non-investment grades)
• Interest Rate Sensitive (mortgage-backed/Agency
  papers)

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Active Strategy
1. Expectation Hypothesis 2. Liquidity Preference
Hypothesis 3. Segmented Market Hypothesis

• ????????????? (?????????????????????)
• ?????????????????????

• ??????????????????????????????? (Inflation
  Expectation)

?????????????? (Bond Supply), ????????????????????
????????? (????????????????????????????????????/??
????????????? ???????? Corporate Bond)
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Active Strategy
Bear-Steppening (???????)
??????????????????????? Yield Curve
Bear
Bear-Flattening (?????)
Bull-Steepening (???????)
Neutral
Bull-Flattening (?????)
Bull
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Active Strategy
Butterfly
Bear
Neutral
Bull