Managing funds against bond market index

Index matching strategies for funds:

1. Simple index tracking

2. Enhanced index tracking, low amount of change:
- yield curve positioning
- call exposure positioning : advantage of inefficiency in callbale bonds yields etc
- sector and quality positioning

3. active investment strategy
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Secondary trading of fixed income:

Reasons:

1. Yield / spread pickup trades: thought that more yield compensates more than needed for lower rating
2. Credit upside trade: expect a credit upgrade in future
3. Credit defense : in response to rating change
4. new issue swaps, sector rotation: new fixed income issues, sector changes, fixed to floating

5. Curve adjustment: in response to yield curve changes
6. Structure trades: in and out of puttable, callable and bullet bond structures dpeending upon interest rate moves.
7. Cash flow reinvestment: How much cashflow is coming from matured issues to absorb supply, and new money for new issues etc.

Spread analysis:
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a) Alternative spread measures: swap spreads , credit default swap spread:
CDS spread: the cost of annual insurance
swap spread: a way to compare between floating and fixed rate market
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Primary market:

Counter intuitively: more debt issuance in investment grade market validates and enhances old debt; compressing credit spread instead of increasing it.

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Liability immunization:
Multiple liability immunization:
sufficient liquid assets to meet all the liabilies that come in the way

cash flow matching: need to look at average reinvestment ratio; assume conservative reinvestment estimates, assume this is fully invested for the duration of horizon.

horizon matching strategy: combination of multiple liability immunization and cash flow matching.