Yield beta?

Can someone please explain. in normal person terms, what yield beta is?

Say you are a US investor who is investing in UK bonds. Rates drop in the US. This has an effect on the UK bonds and yield beta adjusts for this correlation (I think as an example).

This is how I understand it. Don’t know if it’s right or wrong. Think of it in terms of a beta for a stock. A company’s stock has a beta of, let’s say, 1.5. So this stock’s value will change 1.5 times that of the market, since the market has a beta of 1. Now bonds don’t have beta’s but duration. Given that treasury futures bonds and their underlying yields are pretty much used as a base for most fixed income contraptions, these treasury bond yields become the market beta equivalent as explained above. Therefore, comparing the change in the portfolio bond yields to the change in the futures yield or implied yield will tell you how your portfolio will react relative to the fixed income market. Makes sense? This is crap? :))

Niblita75 Wrote: ------------------------------------------------------- > Say you are a US investor who is investing in UK > bonds. Rates drop in the US. This has an effect on > the UK bonds and yield beta adjusts for this (i > think). This is country beta Nibs (also called yield beta in the reading…why does everything use the same names???).

Stupid schweser. So is yield beta basically the same thing as in it just adjusts for some correlation between something.

For Bond Hedging: Change in the yield of a bond/change in implied yield on a futures contract

Niblita75 Wrote: ------------------------------------------------------- > Stupid schweser. So is yield beta basically the > same thing as in it just adjusts for some > correlation between something. The yield beta that the OP is probably talking about is measuring the difference in yield changes between the bond (most likely corporate ) you are trying to hedge and the CTD bond being used to satisfy the Treasury bond future.

So similar to a convexity adjustment (not that they are anything related) in that it makes the hedge more accurate.

can someone reader’s digest what’s gone on with the yield beta? one thing i don’t understand is if CTD bond has a duration of 4 and a conversion factor, and bond portfolio has duration of 6 and you want to adjust, doesn’t the duration of 4 and the conversion factor give you the interest rate sensitivity? isn’t including yield beta double-counting?? what did that chat come to??

westbruin Wrote: ------------------------------------------------------- > can someone reader’s digest what’s gone on with > the yield beta? > > one thing i don’t understand is if CTD bond has a > duration of 4 and a conversion factor, and bond > portfolio has duration of 6 and you want to > adjust, doesn’t the duration of 4 and the > conversion factor give you the interest rate > sensitivity? isn’t including yield beta > double-counting?? > > what did that chat come to?? IMO, you are correct about the interest rate with the conversion factor. Yield beta only comes into play when you are hedging a credit risky bond with a credit risk free bond. It is basically a spread beta.

this thread makes me even more confused… do they do it correctly in the curriculum text?? and/or with errata??

mwvt, thanks very much. greatly appreciated… i think my head is going to explode from learning all this stuff. my confusion comment was pre-seeing your explanation.

westbruin Wrote: ------------------------------------------------------- > mwvt, thanks very much. greatly > appreciated… i think my head is going to > explode I have been trying to piece mine together with duct tape all night. ; )

yeah, i have to take breaks and do other things for half an hour quite often. it’s like nothing else will fit. needs some mental digestion.

lillilland Wrote: ------------------------------------------------------- > Can someone please explain. in normal person > terms, what yield beta is? To clarify, my confusion was from #50 on the CFA free mock exam… 50. Is Groton’s explanation of the yield beta most likely correct? A. Yes. B. No, because the yield beta captures the relation between the portfolio and the CTD bond. C. No, because the yield beta captures the relation between the portfolio and the futures contract. Correct answer was B, and I didn’t understand why…

and what did the institute say??

The future is BASED on the 30 yr US Treasury, but a whole bunch of different bonds can be used to satisfy delivery for the short side. They will always deliver the cheapest bond available. This is called the CTD. The different way your portfolio moves in relation to the CTD is the yield beta.

mwvt9 Wrote: ------------------------------------------------------- > The future is BASED on the 30 yr US Treasury, but > a whole bunch of different bonds can be used to > satisfy delivery for the short side. They will > always deliver the cheapest bond available. This > is called the CTD. > > The different way your portfolio moves in relation > to the CTD is the yield beta. but aren’t they trying to apply both the CTD/conv factor and the yield beta in the textbook??

westbruin Wrote: ------------------------------------------------------- > mwvt9 Wrote: > -------------------------------------------------- > ----- > > The future is BASED on the 30 yr US Treasury, > but > > a whole bunch of different bonds can be used to > > satisfy delivery for the short side. They will > > always deliver the cheapest bond available. > This > > is called the CTD. > > > > The different way your portfolio moves in > relation > > to the CTD is the yield beta. > > > but aren’t they trying to apply both the CTD/conv > factor and the yield beta in the textbook?? If you are hedging a credit risky bond (cross hedge). What book and page are you looking at? I read CFAI a long time ago, schweser lately.

> > What book and page are you looking at? I read > CFAI a long time ago, schweser lately. sorry, it might be schweser. i’ll look at it and hopefully have the page number for you. hopefully in a minute or two… is schweser wrong?? i’ll check both