Credit Cycle The credit cycle plays a pivotal role in determining the fluctuations in credit spread across various maturities and ratings. It is crucial to evaluate the probability of issuer default and the severity of loss throughout the cycle, keeping…

A Credit Default Swap (CDS) is a financial derivative crucial for managing credit risk independently from interest rate risk, offering enhanced liquidity compared to traditional bonds. It enables investors to assume long or short positions with varying maturities, requiring less…

Tail Risk Tail risk is a financial term that refers to the risk of an investment moving more than three standard deviations from its current price, due to extreme changes in the market. This risk is often associated with major…

Liquidity risk refers to the ease and cost associated with buying and selling these instruments. The trading volumes and bid-offer costs can greatly differ across various fixed-income markets and regions. For instance, sovereign bonds in large developed markets like the…

Top-Down Credit Strategies Top-Down Credit Strategies is a method of credit strategy that emphasizes on a wider range of factors influencing the bond market, contrasting the detailed, issuer-specific bottom-up approach. This strategy is guided by macro factors such as economic…

Active Fixed-Income Management Strategies Active fixed-income managers are tasked with the selection of spread-based bond portfolio investments. Their goal is to maximize excess spread across various fixed-income issuer types, industries, and instruments within their investment mandate. The decision-making process may…

Fixed-income portfolio managers often aim to maximize returns by purchasing securities with a higher Yield to Maturity (YTM) and a lower equivalent price than a comparable default risk-free government bond. For instance, if a U.S. Treasury bond offers a 2%…

Yield Curves Yield curves, a graphical representation of the interest rates on debt for a range of maturities, are typically upward-sloping. This means that they show diminishing marginal yield-to-maturity increases at longer tenors, becoming flatter at longer maturities. For instance,…

The expected return on a fixed-income portfolio is given by: \(E(R) \approx\) Coupon income +/− Rolldown return +/− E(\(\Delta\) Price due to investor’s view of benchmark yields) +/− E(\(\Delta\) Price due to investor’s view of yield spreads) +/− E(\(\Delta\) Price…

Investment Management Choosing a benchmark is a pivotal step for an investment manager, following the decision of passive versus active investment or the form of investment. This choice is part of the broader asset allocation process, which starts with a…