《Managing Bond Portfolios》.docxVIP

Chapter16: Managing Bond PortfoliosChapter OpenerPART??IVp. 508IN THIS CHAPTER we turn to various strategies that bond portfolio managers can pursue, making a distinction between passive and active strategies. A passive investment strategy takes market prices of securities as set fairly. Rather than attempting to beat the market by exploiting superior information or insight, passive managers act to maintain an appropriate risk–return balance given market opportunities. One special case of passive management is an immunization strategy that attempts to insulate or immunize the portfolio from interest rate risk. In contrast, an active investment strategy attempts to achieve returns greater than those commensurate with the risk borne. In the context of bond management this style of management can take two forms. Active managers use either interest rate forecasts to predict movements in the entire bond market or some form of intramarket analysis to identify particular sectors of the market or particular bonds that are relatively mispriced.?Because interest rate risk is crucial to formulating both active and passive strategies, we begin our discussion with an analysis of the sensitivity of bond prices to interest rate fluctuations. This sensitivity is measured by the duration of the bond, and we devote considerable attention to what determines bond duration. We discuss several passive investment strategies, and show how duration-matching techniques can be used to immunize the holding-period return of a portfolio from interest rate risk. After examining the broad range of applications of the duration measure, we consider refinements in the way that interest rate sensitivity is measured, focusing on the concept of bond convexity. Duration is important in formulating active investment strategies as well, and we conclude the chapter with a discussion of active fixed-income strategies. These include policies based on interest rate forecasting as well as intramarket analysis t