Strategic Fixed Income Investing An Insider's Perspective on Bond Markets, Analysis, and Portfolio Management

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