Fixed Income Portfolio Management – Active

Fixed Income Portfolio Management – Active

Fixed income portfolio management is a type of portfolio management that focuses on managing a portfolio of investments that generate a predictable stream of income. This includes bonds, money market instruments, and other debt securities.

Active fixed income portfolio management involves actively managing the portfolio by selecting individual securities, adjusting portfolio duration and yield curve positioning, and actively managing credit risk. The goal of active management is to outperform a benchmark index or achieve a specific investment objective while managing risk.

The process of active fixed income portfolio management involves analyzing economic and market trends, assessing credit risk, monitoring interest rate movements, and making investment decisions based on this information. It requires specialized skills and expertise to navigate the complexities of fixed income markets and to make informed investment decisions.

Active management presumes that the manager can generate a positive a (or provide a positive risk-adjusted return). The usage of swaps is quite common. Swaps involve exchanging one bond for another in anticipation of a change in the relative prices of the bonds. Examples of bond swaps are:
- Substitution swap: exchanging one bond for another to exploit pricing discrepancies
- Intermarket spread swap: yield spread between 2 market segments is too wide or too narrow
- Rate anticipation swap: move toward higher/lower D portfolio depending on i-rate forecasts
- Pure yield pickup swap: buy higher yield bonds and sell lower yield bonds (increase in risk)

A manager may stay with the yield curve that is buy and hold, if it is upward sloping and expected to maintain its direction. As maturity declines, yields decline and contribute to capital gains.

Example:

Buy 9-month t-bills with yield of 1.5% per quarter

Price = Rs. 10,000/ (1.015)3 = Rs. 9,563.17

Hold for 6 months. If yields now at 0.75% per quarter, Price = Rs. 10,000/ (1.0075) = Rs. 9,925.56

Return = 1.88% per quarter