Bond Portfolio

Bond Portfolio
Presentation
MSc in Finance
Fixed Income Securities
Team A1
Mark El Chamie
Ellen Schrade
Salvador de Lacerda
Testudo
Salvador Lacerda Ellen Schrade
Mark El Chamie
Management Team
1. 2. Portfolio 3. Investment
Macroeconomic Selection and Analysis &
Analysis Weighting Benchmark
Contents
4. Trades & Risk 5. Outlook

Management
1
Macroeconomic
Analysis
1) Macroeconomic Analysis
Economic Situation
Economic recovery from Covid Pandemic in effect
• US GDP Growth for 2021: 5.6%
• Projected US GDP Growth for 2022: 3.7%
• Projected US GDP Growth for 2023: 2.4%
Indicators show a steady recovery from the Covid-induced slump in economic activity, particularly domestic demand and exports of goods
and services which slumped -13.6% in 2020 (Trade Growth)
• Supply chain disruptions are still a cause for concerns in international commerce
Stronger consumer growth is anticipated due to a continued recovery of the labour market with nominal wage growth picking up and
unemployment rate expected to decrease to 3.8% (2022) from 5.4% (2021) and 8.1% (2020).
Monetary Policy
Current measures:
1. Near-zero Federal Funds Rate
2. Central Bank purchases of Treasury securities and agency mortgage-backed securities
Sustained price pressures prompt gradual hikes in federal funds rate as of mid-2022.
Announced tapering of government bond purchases as recovery becoming more firmly entrenched
• Current Fed Funds Rate: 0.25%
• High YoY Inflation for January 2022: 7.5%
High inflation drives reactionary behavior from Federal Reserve:

• Fed may begin to raise rates from current 0.25% later this year
• May reach hikes of up to 1.5-1.75% by the end of 2023
• Dependent on inflation rates (if “transitory” due to Covid economic recovery), we may see smaller hikes
Fed funds rate hike is done to curb inflation by and support economic recovery:
• Higher rates = More saving, Less spending
Source: OECD US Economic Forecast (December 2021)

Inflation
High inflation
Highest YoY inflation since 1982
YoY Inflation for January 2022: 7.5% environment makes the
Argument whether inflation is transitory or not real return of many
• Driven by economic recovery from Covid
• Higher wages, Higher household spending (Household saving ratio decrease to 12.5% in 2021 from 16.6% in 2020) fixed income securities
• Central Bank monetary policy includes Fed Funds rate hikes to curb inflation
unattractive
High inflation environment makes the real return of many fixed income securities unattractive
Source: OECD US Economic Forecast (December 2021)

Real yield curve is currently negative due to high inflation
Yield Curve
Flattening yield curve – growth will likely moderate in the future --> Upward sloping real yield curve
• Bonds with a longer maturity are less affected by interest rate increases
• Medium-to-Long Term yields are more attractive
• Short-term Interest Rates have been low to incentivise borrowing and spending following the Covid-19
crisis
• Recent announcements of rate hikes by Central Banks around the world due to high inflation
Real Yield
• Real yield (nominal – inflation) is
currently negative for all Treasury
securities except 30yr Treasuries
• High quality securities (Treasuries,
Mortgages, IG corporates) all have
negative annual rates of real yield
• In order to attain positive real yield,
investors must look towards US
high yield corporate bonds or EM
debt
High inflation environment makes corporate bonds more attractive to investors, despite low corporate credit
spread
Yield Curve
• Average spread of Bloomberg US Corporate High-Yield Bond Index (yielding a mere 4%) is 2.8%
• However, corporate credit spread (premium that corporate bonds offer over Treasuries with
comparable maturities) is at its lowest since the 2007 crisis
• In order for investors to attain real returns in the fixed-income market, they must invest into US High-
Yield bonds or Emerging Markets Debt
• However, current supply chain disruptions and other post-Covid conditions make certain
industries riskier than others
• Increased interest rates are likely to push yields higher, as new bond prices and yields adjust to changes
in the interest rate environment
• Corporate Yields remain at a 3.40% plateau for

maturities over 15yrs
• A flatter yield curves tends to coincide with lowest
total returns
Source: Bloomberg (08/31/21)

Source: Charles Schwab (2021). 2022 Corporate Bond Outlook: Focus on Income *Real rates represented by nominal YTM – 5yr inflation breakeven rate of 2.5%
Supply and Demand Issuance
Supply & Demand
Issuance of new debt:

• Increasing interest rates make the issuance of
new debt less attractive
• However, the economy is recovering form the
covid-19 crisis and GDP is expected to rise,
which could positively impact the issuance of
new debt
Demand:
• Higher interest rates mean falling bond prices
which make bond investments less attractive
• However, as the equity market is becoming
more volatile, fixed income investments will
become attractive for hedging
• Bond markets provides high-yield investment
Due to the low interest rate environment, corporate debt has increased immensely over the
opportunities
past 5 years
Value of the Bond Market vs the Stock Market
• The SP 500 has steadily in a bullish market following the recovery from the Covid crisis to new All Time Highs at the 4,600 mark
• EFFR has yet to increase due to interest rate cuts following the pandemic sought to reinvigorate economic activity, promote
borrowing and spending
• 10 Year Maturity Indexes are reaching pre-pandemic levels
• Yet, corporate spreads are lower than ever, and real yields are negative across the bond markets.
Source: Cato Institute (2022). The Fed Doesn’t Rule the Stock Market
2
Portfolio
Selection and
Weighting Process
2) Portfolio Selection and Weighting Process
Investment Thesis of Bond Portfolio
To provide a fixed-income investment opportunity for investors looking to navigate the uncertain interest rate environment
and high inflation while still attaining high returns only attaining through High-Yield securities
Testudo Bond Fund aims to provide attractive returns in a low-yielding bond market, while investing in secure companies
Investment Strategy Risk Profile Portfolio Features

• Low sensitivity to changes in interest
rates (Low Modified Duration of Credit Rating for Capital
Moderate TTM
Portfolio) Protection
2 - 6 years
• Balanced mix between high yield and BBB+ to B
investment grade corporate bonds (B to
BBB+ rated bonds)
• Investment grade: we expect those
bonds to profit the most from Portfolio Metrics
interest-rate hikes
• High-Yield bonds: single B or above Modified Duration Portfolio Yield
rated bonds with short durations
(low risk of default and interest
rate sensitivity)
• Strong Industrial and Financial companies
which will benefit from interest rate hikes
YTM = 6.463%
• US Dollar denominated 2.486
• 2 to 6 year maturities Effective Yield = 5.373%
Portfolio Holdings and Weights
Methodology
1. Portfolio split into 50-50 into Investment Grade and High-Yield
bonds
2. Weight attributed to each individual bond by weighted average

of Modified Duration Score (35% weight) and Bond Rating
Score (15% weight)  Quantified by a point-based scoring
system
• Modified duration is the primary weighting factor, as it is the

primary measure of interest rate sensitivity which underpins the
investment thesis of the portfolio fund
Portfolio Weighting Process
( Bond Mod. Duration Score

Total Type Mod. Duration
x 35% )+( Bond Credit Score
Total Type Credit Score
x 15%
) 15%
35%
3
Investment
Analysis &
Benchmark
Holdings
3) Investment Analysis & Benchmark
Prudential Financial Inc. – A global diversified financial services company specializing in insurance
Company Information Historical Bond Price: Last Price $118.218
Portfolio Financials
Bank of America– One of the world’s largest multinational investment bank and financial services company
Weyerhaeuser – One of the world's largest private owners of timberlands
Morgan Stanley – Global investment bank that operates in 42 countries providing financial services
Citigroup Inc – Third largest American multinational investment bank and financial services corporation
American Airlines Inc – Major American airline that operates an extensive international and domestic network
CEMEX Materials LLC.– Mexican multinational building materials company
Lumen Technologies Inc. – American telecommunications company
Sprint Corp.– American telecommunications company
WisdomTree US Short-term BBB Corporate Bond Index
Overview – Natural Hedge

As a benchmark for our portfolio we have chosen the WisdomTree US Short-term BBB Corporate Bond Index. It captures the
performance of issuers in the lower rated tier of the US investment grade corporate bond market with bonds of maturities
between 1-5 years. As the average rating of our portfolio is BBB and the bonds included are US corporate bonds with a maturity
between 1-6 years, we identified this index to be the most suitable benchmark for our portfolio.
4
Trades & Risk
Management
Trades
Overview
4) Directional Trade
Objective: Bring duration of portfolio up to benchmark duration
Before the trade:

Directional Trade
Bonds traded: Sell bond with lowest duration and buy bond
with higher duration
After the trade:

4) Spread Trade
Expectation: Due to the Russian invasion into Ukraine, the US government will increase
interest rates less than expected to counteract the impact of the war on the US economy
Change in YTM: Expected Price Change:
Portfolio Metrics after the Trade:

4) Bullet Trade
Sell Prudential & Lumen Technologies INC and buy CEMEX Materials LLC
Bullet Trade
YTM
Maturity
Portfolio Metrics after the Trade:

4
Trades & Risk
Management
Reinvestment
Risk & Hedging
4) Reinvestment Risk
Effective Rate
Reinvestment Rate Assumptions Effective Rate
• For the reinvestment rate, a conservative US Treasury Bill has been used
• The average effective yield of our portfolio is 5.373%
4) Hedging
Natural Hedge: Bring duration of the portfolio down to zero by (total immunization)
by taking a short position in the US 10 Year Treasury Bill
Overview – Natural Hedge
4) Hedging
Futures Hedge: Hedge the entire portfolio (duration 0) using the Ultra 10-Year US
Treasury Note Future
Overview – Futures Hedge
5
Outlook
5) Outlook
How does the future look for the fixed income markets? What is the fund outlook?
Opportunities Risks
• Expectations of Interest Rate Hikes by Central Banks provides • Fear of Continued Inflation!  Uncertainty about future
an opportunity for Specialized Funds offering unique Fixed- inflation and currently 30-year highs in US inflation rate may
Income Value propositions erode the real value of cash flows and face value of fixed-
• Low modified duration  Less exposure to interest rate income instruments
risk in times of uncertain monetary policy and high
inflation • Increasing interest rates cause bond prices to fall
• Older bonds become less valuable as their coupon
• Debtors are established US companies with little risk of default payments are now lower than those of newly issued
bonds
• High Concentration of Financial Companies (45% of holdings) • Market value of portfolio may deteriorate
 Tend to outperform when interest rates increase due to • Yields will increase
nature of operations
• Operational risks to underlying companies issuing High- • Trade-Off Risk
Yield bonds is mitigated due to intangible nature of • Equity markets are hot! Provide an opportunity to beat
financial services rising inflation where the bond markets may not.
• Real yields for quality securities are almost entirely negative • Real yields for quality securities are almost entirely negative
• Investors must look to High-Yield US bonds or EM bonds • Investors must look to High-Yield US bonds or EM bonds
Come and invest with us!
Testudo

Bond Portfolio

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Bond Portfolio

Uploaded by

Copyright:

Available Formats

Bond Portfolio

4. Trades & Risk 5. Outlook

High inflation drives reactionary behavior from Federal Reserve:

Source: OECD US Economic Forecast (December 2021)

Source: OECD US Economic Forecast (December 2021)

• Corporate Yields remain at a 3.40% plateau for

Source: Bloomberg (08/31/21)

Supply & Demand

Issuance of new debt:

Investment Strategy Risk Profile Portfolio Features

2. Weight attributed to each individual bond by weighted average

• Modified duration is the primary weighting factor, as it is the

( Bond Mod. Duration Score

Overview – Natural Hedge

Before the trade:

After the trade:

Portfolio Metrics after the Trade:

Portfolio Metrics after the Trade:

Reinvestment Rate Assumptions Effective Rate

You might also like