Index

ABCP. See asset-backed commercial paper

accommodations, 83–84

policy, 31–32

accumulating investors, 37–39

active strategy, 47

ADP Report, 98–99

agency mortgages, 150–151

aggressive strategy, 57–59

alpha, 141–142

analysis, portfolio, 59–69

ARS. See auction-rate securities

asset allocation, 71–79

asset manager, 175

asset-backed commercial paper, 18–20, 130, 162–163

auction-rate securities, 27

August 2011 FOMC statement, 89–93

Bank of America, 4

Bank of England, 84

bankruptcy, Lehman Brothers, 3–4

BBA. See British Bankers Association

Bear Stearns, 3–5, 180

belly of the yield curve, 134

Bernanke, Ben, 31–32, 81

Black Monday, 15–16

BOE. See Bank of England

Bogle, John C., 15, 145

bond ladder, 126. See also laddered bond strategy

alternatives to, 147–150

cash alternative strategies vs., 133–134

concept, 126–128

coupons and, 137–138

goal, 129–131

performance, 140–142

bond supply, 138–140

bonds, diversification of, 51–52

break-even rate, 108–109, 149–150

breaking the buck, 5–6

British Bankers Association, 154

British Petroleum, 43–44

bubble, housing, 16–17

Buffett, Warren, 71, 125, 159, 169, 177

Bureau of Labor Statistics, 97

buy-side transactions, 171–172

calendar, new issue, 138–140

capital appreciation, 38

capital, preservation of, 131

cash alternative strategies, laddered bond strategy vs., 133–134

cash strategy, 55

CD. See certificates of deposit

central banks, deposits with, 84–86

certificates of deposit, 162, 166–167

CES. See current employment statistics

Churchill, Winston, 29

collateralized debt obligations, 18–20

commercial paper, 162–163

company fundamentals, 164–165

complexity, of fixed income market, 125–126

confidence, 181–182

conservative strategy, 54–56

consumer price index, 104–109, 147

consumption, as indicator, 109–110

corporate bonds, 51

as alternative to laddered bond strategy, 151–153

interest rates and, 152–153

corporate floating-rate notes, 153

correction pattern, 16–17

corrective action, 167

coupons, 151

consistency of, 137–138

laddered bond strategy and, 137–138

resets, 157

CPI. See consumer price index

credit analysis

necessity for, 160–161

ongoing, 165

sovereign debt and, 161

staying ahead of competition and, 166–167

credit environment, 165

credit opinion, 61

credit profiles, differences in companies, 164–165

credit rating

changes to, 163–164

U.S., 8–9

credit risk

portfolio construction and, 68–69

reducing, 62–63

current employment statistics, 97

data points, 72, 95–97

dealer inquiries, 172

debt ceiling, U.S., 8, 10–12

debt rating

Treasury securities, 8–9

U.S., 7–8

Deep Water Horizon, 43–44

default risk, defined, 113

details, importance of, 177–179

direction, finding, 30–33

disagreements, among traders, 181–182

dislocation, 134, 178

distributing investors, 38–40

distributions, consistent, 131

diversification, 44, 151–152

assessing, 61–62

dollar, strength of U.S., 12–13

Douglas, Michael, 30

doves, 82

downgrades, credit rating, 163–164

duration, 132

ECB Eurozone Liquidity Recourse to the Deposit Facility index, 85–86

ECB. See European Central Bank

economic climate index, 75

economic indicators, 95–97

economy, status of, 30–33

efficiencies, 72, 142

Enron, 5

environmental impact, on liquidity, 135–136

equity markets, Treasury bills and, 21–24

euro, 10

European Central Bank, 84

European Union, 10

executed price, 171–172

executing the trade, 169–170

Fannie Mae, 78–79

FDIC. See Federal Deposit Insurance Corporation

Fed chairman, as indicator, 110

Federal Deposit Insurance Corporation, 166–167

federal funds rate, 82–83

Federal Home Loan Bank, 78–79

Federal Open Market Committee, 31, 81, 147–148, 154–157

FHLB. See Federal Home Loan Bank

financial ratios, 164–165

Fitch, 159–160

fixed income market, complexity of, 125–126

fixed-income investor, short-term, 83

flat yield curve, 120–121

floating rate notes, 66–67

as alternative to laddered bond strategy, 153–156

interest rates and, 153–157

FOMC statement

August 2011, 89–93

clues from, 88–89

FOMC. See Federal Open Market Committee

forecast, 131

Franklin, Benjamin, 37

Freddie Mac, 5, 78–79

front end, 133

fundamentals, of company, 164–165

GDP. See gross domestic product

Gekko, Gordon, 30

global allocation, 76–79

global disruption, possibility of, 10–12

global gross domestic product, 76

goals

analyzing portfolio for compliance, 59–69

bond ladder, 129–131

portfolio construction and, 51–59

Goldman Sachs, 4

government intervention, 162

quantifying, 43–44

government securities, 64–65

government-insured market, 166–167

Greece, 139–140

greed, 30

Greenspan, Alan, 3–4

gross domestic product, 76, 109, 163

Gulf oil spill (2010), 43–44

hawks, 82

high-yield markets, 51

housing bubble, 16–17

income, receiving, 131

indicators

consumption as, 109–110

Fed chairman as, 110

inflation as, 103–109

labor market as, 99

temporary help as, 101

yield curve as, 123–124

inflation, 147–150

as indicator, 103–109

portfolio construction and, 67–68

inquiries, dealer, 172

instinct, 179–181

interest rate environment, portfolio construction and, 65–66

interest rate risk, defined, 113

interest rates

corporate bonds and, 152–153

floating rate notes and, 153–157

mortgage-backed securities and, 151

yield curve and, 118–119

inverted yield curve, 121–123

investment banks, 4

investment policy statement, 59

investors

accumulating, 37–39

calming, 93

distributing, 38–40

risk-averse, 42–43

risk-taking, 44–45

Japan, 12

JP Morgan, 3–5, 180

Khrushchev, Nikita, 95

labor market, as indicator, 99

laddered bond strategy, 126

alternatives to, 145

cash alternative strategies vs., 133–134

concept, 126–129

corporate bonds as alternative to, 151–153

coupons and, 137–138

credit analysis and, 161–163

floating rate notes as alternative to, 153–156

goal, 129–131

mortgage-backed securities as alternative to, 150–151

performance of, 140–142

Treasury Inflation-Protected Securities as alternatives to, 147–150

LDI. See liability driven investments

Lehman Brothers, 3–5, 135, 153, 157, 162, 180–181

liability driven investments, 132

LIBOR. See London Interbank Offered Rate

liquidity, 24, 134–136, 152, 173

environment impact on, 135–136

London Interbank Offered Rate, 153–157

defined, 154

long end, yield curve, 131–133

Long-Term Refinancing Operations, 85

low turnover, 141–142

low turnover strategy

alternatives to, 145

credit analysis and, 161–163

low-yield environment, 145–146

LTRO. See Long-Term Refinancing Operations

Lynch, Peter, 111

market volatility, 132

MBS. See mortgage-backed security

measurement, of performance, 140–142

Merrill Lynch, 4

Merrill Lynch Option Volatility Estimate (MOVE), 42–43

model, customized, 73–74

moderate strategy, 56–57

monetary policy, defined, 81

money market, 5–6, 18–20, 116–118, 135

money market strategy, 55

money

fear of losing, 42

loss of, 45

Moody's, 159–160

mortgage-backed securities

as alternative to laddered bond strategy, 150–151

interest rates and, 151

mortgages, 150–151

MOVE. See Merrill Lynch Option Volatility Estimate (MOVE)

municipal bonds, 25–27

municipal market, 172

new issue calendar, 138–140

nonagency mortgages, 150–151

nonfarm payroll report, 98–103

Operation Twist, 84, 156–157

passive strategy, credit analysis and, 161–163

pattern, correction, 16–17

payroll, 97

PCE. See Personal Consumption Expenditure Core Price index

performance

of bond ladder, 140–142

measurement, 140–142

Personal Consumption Expenditure Core Price index (PCE), 107–109

placing the trade, 169–170

portfolio analysis, 59–69

portfolio construction

credit risk and, 68–69

goals and, 51–59

inflation and, 67–68

interest rate environment and, 65–66

risk and, 50–51

portfolio turnover, 131

portfolio volatility, 132

PPI. See producer price index

prepayment risk, 151

preservation of capital, 131

price, execution, 171–172

price discovery, 136

producer price index, 103–109

QE. See quantitative easing

QE3, 86–87, 92

quantitative easing, 84

rating agencies, 159–160

recession, 146, 156–157, 182–183

recovery, 182–183

reinvestment risk, defined, 113

rescue of U.S. economy, 31–32

Reserve Fund, 5–6

residential mortgage-backed securities, 165

reward, risk versus, 53–54

risk, 40–41, 65–69

defining, 40

portfolio construction and, 50–51

reducing, 77–78

reward versus, 53–54

systemic, 76

risk characteristics, 42

risk-averse investors, 42–43

risk-taking investors, 44–45

RMBS. See residential mortgage-backed securities

S&P. See Standard and Poor's

sales coverage, 175

sell-side transactions, 171–172

sentiment index, 73–74

short-term fixed income investor, 83

short-term strategies, varieties of, 133–134

SIV. See structured investment vehicles

size of trade, 171–172

Soros, George, 49

sovereign debt, credit analysis and, 161

spread, 115–116

stable principal, goal of, 55

Standard and Poor's, 159–160

steep yield curve, 119–120

strategy, 125

active, 47

aggressive, 57–59

conservative, 54–56

credit analysis and, 161–163

defining, 45–47

moderate, 56–57

short-term, 133–134

success, 142–143

structured investment vehicles, 130

supply of bonds, 138–140

systemic risk, reducing, 76

temporary help, as indicator, 101

time horizon, 44–45

TIPS. See Treasury Inflation-Protected Securities

trade, executing, 169–170

trade, size, 171–172

transaction ease, 173–175

transactions, price execution, 171–172

transparency, 72, 172

Treasury bills, 20–24

equity markets and, 21–24

Treasury default, 12–13

Treasury Inflation-Protected Securities (TIPS), 56, 106, 147–150

as alternative to laddered bond strategy, 147–150

Treasury securities, debt rating, 8–9

turnover ratio, 131, 133–134

turnover, low, 141–142

U.S. credit rating, 8–9

U.S. debt ceiling, 8

raising, 10–12

U.S. debt rating, 7–8

U.S. dollar, strength of, 12–13

U.S. economy, rescue of, 31–32

U.S. Treasury default, 12–13

underwriter, 173

upgrades, credit rating, 163–164

variable-rate demand obligations, 26–27

visible supply, 138–140

VIX index, yen and, 10–11

volatility, 129–130, 132, 153

VRDO. See variable-rate demand obligations

Welch, Jack, 7

WorldCom, 5

wrapper, 25–27

wrapper, as liability, 25–26

yen, VIX index and, 10–11

yield curve, 113–114

belly, 134

flat, 120–121

as indicator, 123–124

interest rates and, 118–119

inverted, 121–123

long end, 131–133

steep, 119–120

Treasury bills, 20–24

zero interest rate policy, 155