Volume4 Reading27- regarding semiactive quity investing

Dear all

on the page 251 it says

Derivative semiactive strategy attempt to add value by altering the duration of the underlying cash.

one simple approach could be to vary the duration between 90 days bills(cash) and 3year notes based on yield curve slope. When this segment of the yield curve slopes steeply, the manager should invest in longer-duration fixed income, because the higher yield compensates the investor for the increased risk.

It troubles me that when the yield curve slopes steeply which means interest increase, and based on FI section, short duration bond will outperform (less price decrease), doesn’t it?



view is preetty short term, only looking to capture increase in yield (due to YC steepness)

Yes, you are holding it only for a short term, maybe a year and earn interest higher than what cash earns.

Say, rather than keep it in cash, if you buy new 4 year maturing treasury bond at par with 5% coupon rate (5 YR treasury is 6%, 3 YR is 4%, 2 YR rate is 3% and 3month TBill is 2%), say you keep it for a year and rates do increase by 1% in parallel. Now your security becomes a 3-year maturity bond paying 5% coupon while the 3 YR treasury increased from 4% to 5%. You can probably sell your bond at par, so no price loss and for one year you gained 5% coupon payments, much better than staying in cash.

Just a hypothetical case. Makes sense?

When a yield curve is ALREADY steep, invest in longer-term instruments to capture additional yield. If you anticipate a steepening yield curve, you’d go shorter term to reduce twist damage.

Thanks for all yr reply,

i guess the key point is “yield curve is ALREADY steep” as grumble said…

thanks again…

“3-year” is also relevant. When this segment of the yield curve slopes steeply and assume a one year investment period:

* Investing in longer-duration bonds(3-year bonds): higher yield compensate the higher interest rate risk * Investing in shorter-duration bonds(90-day bills): lower yield and lower reinvestment rate.

Notice that we are discussing Fixed Income in an Equity Study Session? :smiley: