1 University of Hong Kong Trading Workshop David Lo Class 8 Fixed Income Workshop III Strategies in Bullish & Bearish Interest Rate Environment.

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Presentation transcript:

1 University of Hong Kong Trading Workshop David Lo Class 8 Fixed Income Workshop III Strategies in Bullish & Bearish Interest Rate Environment

2 Agenda Forecast Interest Rate Trend Forecast Interest Rate Trend - Economic condition, yield curves, etc Speculation Strategy Speculation Strategy Hedging/Switching Strategy Hedging/Switching Strategy

3 Easier charting (Yield Curve or ECI)

4 Interest Rate UP > Bond Price Down ? Sell T-Bond Future ? Buy T-Bond Put Option Speculation

5 US Long Bond Future (T-Bond Future)

6 US JUNE T-BOND FUTURE & OPTIONS

7 Fundamentals of Bond Strategies Passive Bond ManagementPassive Bond Management  Buy and hold - Hold the bonds until maturity.  Index tracking - Construct a portfolio to match the performance of a bond index

8 Fundamentals of Bond Strategies Active Bond Trading Active Bond Trading  Anticipating future interest rate movement - Yield curve shifts - Bullet Strategy - Barbell Strategy - Ladder Strategy Detecting mis-priced bonds Detecting mis-priced bonds - Searching for bonds with higher yield compared to similar credit rating. Yield spread Yield spread - Buy higher yielding/Sell lower yielding bonds – expects narrowing of spread. - Buy lower yielding/Sell higher yielding bonds – expects widening of spread.

9 Fixed Income Search Search by bond type, coupon, credit, maturity date etc For example, find all convertible bonds in HKD

10 XtraView-Bond Data

11 Yield Curve Model

12 Bond Analysis You can price from Benchmark, interpolated curve, Credit curve and another comparable issue

13 Structured Asset Swap Model

14 Structured Asset Swap 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 Automatically creates an interest rate swap that matches the cashflows of the selected bond Calculates up front payment together with the actual asset swap spread Cash flows details Sophisticated industry asset swaps analytics in real time within a single display Asset swap calculations on different zero curves of your choice Features and Benefits

15 Bond Comparison

16 Alternatives Floating Rate Notes (FRN) Floating Rate Notes (FRN) - Variable interest rate that is usually adjusted every 6 months. Asset Swap Asset Swap Treasury Inflation Protection Securities (TIPS) Treasury Inflation Protection Securities (TIPS) - Coupon & principal is adjusted based on inflation - Quote page: - Index-linked Gilts – in Britain

17 Q & A