Translation needed on CFA Wording - Bonds

Hi, Can anyone explain what this means in “plain english”. Taken from Reading 30, Book 4, page 79… “Because new 15-year structures take 5 years to descend along a positively sloped yield curve to their underlying 10-year bellwether, 15-year maturities hold less appeal for many investors in search of return through price appreciation emanating from benchmark rolldown” Benchmark rolldown? I just don’t know what this means in english?

10-Year Treasury is the Benchmark. Assume a positively sloped yield curve. As the 15-Year rolls down the yield curve, it’s yield will decrease / price will increase. Benchmark rolldown simply means rolliing down the yield curve towards its Benchmark - the 10-Year Treasury. There’s a huge section on this in Fixed Income. Maybe we’ll see it in an item set.

I would be surprised if that shows up on the exam…thats a pretty granular bond investment strategy. but, here goes… The bottom line answer is that roll return is a strategy to pick up relatively quick capital appreciation from a bond investment. In cash fixed income markets, investors buy spread products (Agencies, Corporates, etc…) priced off of a benchmark rate, i.e. a 2,5,10, or 30 year treasury bond. A 15 year bond will be priced off of a 30yr on the run treasury. However, you may be able to find an 11 or 12 year bond that is priced off the 30 year treasury but will “roll” down the yield curve and start being priced off of a 10 year treasury. During periods (like now) when the treasury curve is steep, or positively sloped, an investor can find opportunities to generate what is known as roll return. If a 10 year treasury yields 3.75%, and a 30 year treasury yields 5.0%, there is 1.25% between the 10 year and 30 year treasury. That is the basis of your opportunity for roll return. For example, assume JP Morgan bonds trade at 300 bps over its respective benchmark rate across the treasury curve (300 over the 2,5,10, and 30 year treasury). The 10 year JP Morgan Bond would therefore trade at a 6.75% yield and a 15 year JP Morgan Bond would trade at a 8% yield (it is priced off of the 30 year bond because there is no on the run benchmark between 10 and 30 year treasuries). However, one can find opportunities to buy an 11 - 12 year JP Morgan bond in the secondary market that is still priced off of the 30 year treasury bond. If you believe the treasury curve will stay steep for some time (for the sake of this example just assume the curve stays constant for your holding period), you can buy the 11-12 year JP Morgan bond at an 8% yield, and during your holding period the JP Morgan bond will “reprice” in the market, going from a 8% yield to a 6.75% yield just because it will start being priced over the 10 year benchmark. This will give you capital appreciation even if the credit spread remains at 300 bps over the benchmark rate.

Edward are you a superlurker? Did you just sign up to get your question answered and will never post again? Just curious, as some of us were just recently discussing super lurkers. You happen to be L3 and have 2 posts.

to clarify : superlurker =/= uberlurker, right?

I would say superlurker does not equal uberlurker because otherwise Edward would have already known what Benchmark Rolldown meant and never created an account to ask the question.

Hi, Very much appreciate the response! I read this website for L1&2, but never joined/posted. Will post a few more if I can be of helpful to anyone, but it looks like you guys are WAY ahead of me. I’m cramming to give myself a decent shot at passing this year. Thanks!