Toward Greater Transparency and Efficiency in Trading Fixed-Income ETF Portfolios

The over-the-counter global corporate bond market, characterized by opacity and illiquidity, is undergoing a rapid transformation driven by new regulations and technology. Bond exchange-traded funds (ETFs) offer one vision of the possible future of the market, trading on organized exchanges with typically narrow spreads and high liquidity. The success of bond ETFs relies critically on the efficient functioning of arbitrage. In recent years, improved real-time technology combined with greater post-trade transparency (e.g., through TRACE) has made it possible to generate intraday estimates for a fixed-income portfolio based on individual bond data and macro-market parameters. In this article, the authors describe one possible approach to developing and implementing such an intraday estimate. From a practical perspective, they illustrate how investors and traders can use these estimates as a complement to existing data (such as end-of-day NAV) to better understand the underlying bond portfolio value during the trading day and for transaction cost analysis. More generally, the article illustrates the potential for new analytics to increase transparency and further accelerate the ongoing evolution of fixed-income markets.

Estratégias de Imunização de Carteiras de Renda Fixa no Brasil

This paper aims to statistically compare the performance of two hedging strategies for Brazilian fixed income portfolios, with discrete rebalancing. The first hedging strategy matches duration, and hence it considers only small parallel changes in the yield curve. The alternative methodology ponders level, curvature and convexity shifts through a factor model. We first estimate the yield curve using the polynomial model of Nelson & Siegel (1987) and Diebold & Li (2006) and then immunize the fixed income portfolio using Litterman & Scheinkman’s (1991) hedging procedure. The alternative strategy for portfolio immunization outperforms duration matching in the empirical exercise we contemplate. Additionally, we show that rebalancing the hedging portfolio every month is more efficient than at other frequencies.

Golden Opportunity: Commercial Real Estate Valuation

Aurelia Dimas had been sent to investigate the various properties being offered by the State of California in the form of a sale-leaseback agreement. The opportunity was perfect for her firm, Orrington Financial Partners, which had recently expanded its fixed-income portfolio to include real estate. The wide range of offerings in the Golden State Portfolio provided both diversification and stability over a period of decades. She had spent the last week walking the halls of each and every building to see the offering first hand. Now the task of valuing the portfolio rested on her shoulders.By reading and analyzing this case, students will be exposed to real estate valuation and understand the issues with a sale-leaseback investment. The objectives are obtained by requiring students to justify how and why they make adjustments to the cash flow forecasts provided to them by a real estate advisory firm, explain their methodology for arriving at a specific value for a piece (or a portfolio) of commercial property, and debate the pros and cons of a sale-leaseback structure.