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University of Hong Kong
Trading Workshop
Class 8
Fixed Income Workshop III
Strategies in Bullish & Bearish Interest Rate Environment
David Lo
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Agenda
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Forecast Interest Rate Trend
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Economic condition, yield curves, etc
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Speculation Strategy
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Hedging/Switching Strategy
Easier charting (Yield Curve or ECI)
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Speculation
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Interest Rate UP > Bond Price Down
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? Sell T-Bond Future
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? Buy T-Bond Put Option
US Long Bond Future (T-Bond Future)
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US JUNE T-BOND FUTURE & OPTIONS
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Fundamentals of Bond Strategies
• Passive Bond Management
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Buy and hold
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
Index tracking
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Hold the bonds until maturity.
Construct a portfolio to match the
performance of a bond index
Fundamentals of Bond Strategies
Active Bond Trading

Barbell
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Anticipating future interest rate movement
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% of Portfolio
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Yield curve shifts
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0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 15- 21- 2620 25 30
Maturities
Ladder
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% of Portfolio
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21
-2
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Maturities
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11
9
7
5
6
3
Ladder Strategy
45
40
35
30
25
20
15
10
5
0
1
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Barbell Strategy
% of Portfolio
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Bullet Strategy
15
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Bullet
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20
5
4
3
2
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Detecting mis-priced bonds
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0
1
2
3 4
5
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8 9 10 11 12 13 14 15 16 17 18
Maturities
Searching for bonds with higher yield compared to similar credit rating.
Yield spread
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Buy higher yielding/Sell lower yielding bonds – expects narrowing of spread.
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Buy lower yielding/Sell higher yielding bonds – expects widening of spread.
Fixed Income Search
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Search by bond type, coupon, credit, maturity date etc
For example, find all
convertible bonds in HKD
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XtraView-Bond Data
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Yield Curve Model
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Bond Analysis
You can price from
Benchmark, interpolated
curve, Credit curve and
another comparable issue
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Structured Asset Swap Model
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Structured Asset Swap
Features and Benefits
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Calculate the margin to a floating interest rate when creating a
synthetic floating rate instrument from a bond via an interest rate
swap in different currencies
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Automatically creates an interest rate swap that matches the
cashflows of the selected bond
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Calculates up front payment together with the actual asset swap
spread
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Cash flows details
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Sophisticated industry asset swaps analytics in real time within a
single display
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Asset swap calculations on different zero curves of your choice
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Bond Comparison
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Alternatives
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Floating Rate Notes (FRN)
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Variable interest rate that is usually adjusted every 6
months.
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Asset Swap
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Treasury Inflation Protection Securities (TIPS)
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Coupon & principal is adjusted based on inflation
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Quote page: <TIPSINDEX>
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Index-linked Gilts – in Britain <0#GBTSYIL=>
Q&A
[email protected]
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