Fixed Income Strategies

Section: Fixed Income Portfolio Strategies Estimated study time: 45 minutes Content: Fixed income portfolio management at Level 3 requires integrating rate views, credit analysis, and portfolio construction across multiple dimensions of risk: duration, yield curve shape, credit spread, currency, and liquidity. Managers must construct portfolios relative to a benchmark — typically the Bloomberg US Aggregate or a customized liability benchmark — while managing tracking error, maintaining liquidity, and implementing interest rate views. Duration management is the primary lever for expressing interest rate views. Modified duration measures the percentage price change per 1% change in yield. Dollar duration (DV01) measures the dollar change per 1 basis point change in yield. Portfolio duration is the market-value-weighted average of individual security durations. A manager who expects rates to fall will extend portfolio duration above the benchmark (buy longer-duration bonds); a manager who expects rates to rise will shorten duration (shift to shorter maturities, increase cash, or use interest rate futures/swaps to reduce effective duration). Yield curve strategies go beyond parallel shifts. A bullet portfolio concentrates holdings around a single maturity point; a barbell portfolio combines very short and very long maturities; a ladder portfolio distributes holdings evenly across maturities. The relative performance of these structures depends on the shape of yield curve movements. Bullet portfolios outperform when the yield curve flattens at the concentrated maturity point. Barbell portfolios outperform when the yield curve humps (intermediate rates rise relative to short and long ends) — the barbell avoids the intermediate maturity point. Ladder portfolios provide stable income and reinvestment diversification. Credit strategies involve moving up or down the credit quality spectrum based on spread expectations. Investment-grade credit spread tightening benefits portfolios overweighted in…