Build a fixed income portfolio that will weather volatility and instability Designing a fixed income portfolio is an essential skill of any investment manager or advisor. This book outlines the critical components to successfully navigate through stable and turbulent markets, using real-life lessons from a seasoned institutional asset manager. The first section includes commentary on the changing fixed income market and overall economy, while the second section outlines the processes to navigate these ever-evolving markets including portfolio construction, the Federal Reserve, credit analysis and trade execution. Ladder Methodology is highlighted and the book discusses its pros and cons, gives examples of both well-constructed and poorly executed laddered bond portfolios and offers alternatives to traditional asset classes. Benefit from lessons learned, providing real life examples of market scenarios and trades Prepare fixed income portfolios that can weather any storm Written by Sean P. Simko, an expert on fixed income investing, who shares his investing experiences from the past 16 years Outlines the key principles of the Ladder strategy From strategy to execution, Strategic Fixed Income Investing offers the road map to help investment managers prepare portfolios that will insulate investments against adverse market conditions.
Preface xi Acknowledgments xiii PART ONE The Investing Environment 1 CHAPTER 1 Expect the Unexpected 3 The Model Has Changed 4 Lessons Learned 4 From Bad to Worse 5 CHAPTER 2 Navigating through Troubled Water 7 Debt Ceiling 8 Triple A: Lost, but Not Forgotten 8 Possible, but Not Probable, Consequences 9 Warning Signs 12 CHAPTER 3 Lessons Learned 15 Patterns Emerge 16 Money Markets 18 Treasury Bills, the Favored Asset Class 20 Municipals Felt the Pain as Well 25 Auction-Rate Markets Were Hit Hard 27 CHAPTER 4 Direction in a Sometimes Directionless Market 29 Finding Direction 30 PART TWO The Fixed Income Investor 35 CHAPTER 5 Define the End Investor 37 Risk 40 Risk-Averse Investor 42 A Problematic Trade? 43 Risk-Taking Investor 44 Define Your Strategy 45 Active Strategy 47 CHAPTER 6 Portfolio Construction 49 Factor 1: Defining Your Risk 50 Factor 2: Aligning Goals 51 Conservative Strategy 54 Moderate Strategy 56 More Aggressive Strategy 56 Factor 3: Portfolio Analysis 59 Reduction of Credit Risk 62 Government Securities 64 Risks to Consider 65 Bottom Line 69 CHAPTER 7 Asset Allocation 71 The Road Map 72 Going Global 76 CHAPTER 8 The Federal Reserve and Central Banks 81 Hawks and Doves 82 The Fed Funds Rate 82 A Short-Term Fixed Income Investor 83 Hooked on Accommodation 83 Deposits with Central Banks 84 What about the United States? 86 FOMC: Look for Clues from the Fed Statement 88 What to Look For from the Fed ... Clues? 88 FOMC Statement: August 2011 89 QE or Not QE 92 Calming Statements for Investors 93 CHAPTER 9 The Economy and the Markets 95 The Payroll Picture: The Backbone to the Economy 97 Bureau of Labor Statistics Website 97 Inflation: A Fixed Income Investor's Enemy 103 Consumption: America's Fuel 109 The Federal Chairman: The Wizard Himself 110 CHAPTER 10 The Yield Curve 111 The Spread 115 The Money Market Arena 116 The Direction of Rates 118 A Steep Yield Curve 119 A Flat Yield Curve 120 An Inverted Yield Curve 121 Listen to the Curve 123 CHAPTER 11 The Ladder and Why You Need One 125 How It Works 126 The Concept 126 The Goal 129 The Long End Poses Challenges 131 The Front End Is Technical 133 Varieties of Short-Term Strategies 133 The Sweet Spot 134 Liquidity 134 Consistent Coupons 137 Why Is Supply Important? 138 Performance and How to Measure It 140 Low-Turnover Dilemma 141 Success of a Strategy 142 CHAPTER 12 Alternatives to a Traditional Ladder Strategy 145 TIPS: The Other Treasury 147 Break-Even Opportunity 148 Consider MBS Pools of Mortgages 150 Consider Corporate Bonds 151 Floating-Rate Notes 153 What Is LIBOR? 154 A Deeper Look at LIBOR 154 The Bottoming Process 156 CHAPTER 13 Credit Analysis 159 The Agency 159 Credit Analysis: Necessary, Not Optional 160 Credit for a Passive Strategy 161 After the Initial Approval 163 Not All Bonds Are Equal 164 Stay Ahead of the Herd 166 CHAPTER 14 The Four Pillars of Trade Execution 169 The First Pillar: Executed Price 171 The Second Pillar: Dealer Inquiries 173 The Third Pillar: Liquidity 174 The Fourth Pillar: Ease of Transaction 174 CHAPTER 15 There Are No Roadblocks, Just Detours 177 Know What You Own 177 Banking Sector 178 Go with Your Gut! 179 Don't Take It Personally 181 Trapped in Purgatory 182 Index 185
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