advanced concepts in public investment analytics€¦ · 15-01-2020 · advanced concepts in...
TRANSCRIPT
![Page 1: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/1.jpg)
Advanced Concepts in Investment AnalyticsRaymond JohnsonFixed Income Specialist
January 15, 2020Claremont, CA
![Page 2: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/2.jpg)
Risk Evaluation and Return Measurement
Key Concepts:
Market EvaluationDuration (Modified and Effective)ConvexityDollar Value of an 01Spread DurationHorizon/Scenario AnalysisOption Adjusted Spread Analysis
![Page 3: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/3.jpg)
Current Market Environment: Fed Funds
Trump Tax Cuts
S&P Stock Drop
![Page 4: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/4.jpg)
Treasury Yield Curve: Bills Expensive
Treasury Short Coupons
T-Bills
![Page 5: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/5.jpg)
Question #1
What is the spread between 3 month T-bills and 5 Year Government Bonds?
Where has this spread been over the past 3 years?
![Page 6: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/6.jpg)
Treasury Yield Curve: Fairly Flat
3M Bills – 5 Year Notes 16bps
![Page 7: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/7.jpg)
Treasury Yield Curve: YTD Change
Yield Curve Inversion has substantially reduced.
![Page 8: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/8.jpg)
Fed Funds, 3M Bills and 2 Year Government Yields
O/N Rates3M Bills2 Year Yields
![Page 9: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/9.jpg)
3M Bills, 2 Year and 5 Year Government Yields
January 2017 3M/5Y spread was 150 basis points.
![Page 10: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/10.jpg)
3M Bills, 2 Year and 5 Year Spreads
![Page 11: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/11.jpg)
Question #2
How much in yield can you pick up by buying AA Corporate Bonds?
How have corporate bonds spreads changed over the past 3 years?
![Page 12: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/12.jpg)
AA Corporate Bonds vs Treasury Coupons
AA Corporate Financial Bond Yields
Treasuries
AA Spreads
![Page 13: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/13.jpg)
AA Corporate Financial Bonds 3 Year Spreads
Spreads are at historically tight levels.
![Page 14: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/14.jpg)
Current Market Expectations
![Page 15: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/15.jpg)
What does this all mean in terms of returns?
Comparing Returns:
3 Month Money Market Returns1-3 Treasury Note3-5 Year Corporate Bond
![Page 16: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/16.jpg)
Question #3
What were the returns of the following indices during the past year?
3 Month Treasury Returns1-3 Treasury Note3-5 Year Corporate Bond
![Page 17: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/17.jpg)
Quantifying Returns: Bills/1-3 Govies/3-5 Year Corp
Annualized Equivalents: 1.00%1.35%3.40%
![Page 18: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/18.jpg)
Quantifying Returns: Bills/1-3 Govies/3-5 Year Corp
GFC: Great Financial Crisis of 2007-8
![Page 19: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/19.jpg)
Portfolio Management = Risk Management
Key Concepts:
Price/Yield (to worst, to maturity to average life)Duration (Modified and Effective)Dollar Value of an 01Spread DurationConvexityCost of CarryOption Adjusted Spread AnalysisHorizon and Scenario Analysis
![Page 20: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/20.jpg)
Question #4
What is price? (Quoted Price)
Bills, Discount Notes and Commercial PaperFixed Rate BondsFloating Rate Securities
![Page 21: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/21.jpg)
Money Market Yield vs Discount.
![Page 22: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/22.jpg)
Money Market vs Bond Equivalent Day Counts
![Page 23: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/23.jpg)
Callable Bonds: YTC/YTW/YTM
![Page 24: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/24.jpg)
Callable Bonds: YTC/YTW/YTM
![Page 25: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/25.jpg)
Callable Bonds: Option Adjusted Spread
![Page 26: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/26.jpg)
Corporate Bond Evaluation: Price/Yield/Spread
![Page 27: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/27.jpg)
Floating Rate Bonds: Price/Yield/Discount Margin
![Page 28: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/28.jpg)
Fixed Income Risk Evaluation
Duration (Modified vs Effective)Dollar Value of an 01ConvexityOption Adjusted Spread AnalysisSpread Duration
![Page 29: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/29.jpg)
Duration Definitions
Macaulay's Duration is the present value weighted average maturity of a bond.
Modified Duration is the percentage price change of a security for a given change in yield.And is calculated as: Macaulay Duration / [1 + (IRR/M)]where: IRR is the internal rate of return.M is the number of compounding periods per year.
Effective Duration is a duration calculation for bonds with embedded options. Effective duration takes into account that expected cash flows will fluctuate as interest rates change. The OAS Effective Duration represents the change in price for a 1% parallel shift of the OAS curve.
![Page 30: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/30.jpg)
Bullet Security: Modified and Effective Similiar
![Page 31: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/31.jpg)
Callable Security: Modified and Effective Diverge
![Page 32: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/32.jpg)
Callable Bonds: Option Adjusted Duration (Eff.)
![Page 33: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/33.jpg)
Callable Security: Modified vs Effective Duration
![Page 34: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/34.jpg)
Floating Rate Bonds: Spread/OAS Duration
![Page 35: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/35.jpg)
Evaluation of Bonds in Non-Static Scenarios
Cost of CarryScenario/Horizon AnalysisConvexity
![Page 36: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/36.jpg)
Cost of Carry: Calculating Value
![Page 37: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/37.jpg)
Question #5
If interest rates remain unchanged during the next two years.
Which security would you prefer to own?
1. US Treasury 1 ½ Maturing 11/30/24 yielding 1.71%
2. FHLB 1.80% Maturing 11/30/24 callable 11/30/22 at 100.00
![Page 38: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/38.jpg)
Scenario Analysis and Curve Rolldown
![Page 39: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/39.jpg)
Scenario Analysis and Curve Rolldown
7 Basis Points of Curve Roll Down
![Page 40: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/40.jpg)
Convexity
When is having a more convex bond bad?
Answer: Never
![Page 41: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/41.jpg)
Portfolio Analysis and Risk
Aggregating RiskMonitoring Sector ConcentrationsQuantifying the Impact of Yield Curve ShiftsMonitoring Current Mark-to-Market
![Page 42: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/42.jpg)
Characteristics Analysis
![Page 43: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/43.jpg)
Key Rate Durations
![Page 44: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/44.jpg)
Monitoring Portfolio Duration Risks
![Page 45: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/45.jpg)
Cash Flow Reporting/Monitoring
![Page 46: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/46.jpg)
Tracking Historical Performance
![Page 47: Advanced Concepts in Public Investment Analytics€¦ · 15-01-2020 · Advanced Concepts in Investment Analytics Raymond Johnson Fixed Income Specialist January 15, 2020 Claremont,](https://reader034.vdocuments.us/reader034/viewer/2022042309/5ed690d25cd0d56eef02ebf9/html5/thumbnails/47.jpg)
Portfolio Scenario Analysis