Quantitative Management of Bond Portfolios Book

Foreword by Steve Ross ix Acknowledgments xi Note on Authorship xiii

Introduction xv

PART I: Empirical Studies of Portfolio Strategies and Benchmark Design

EVALUATING INVESTMENT STYLE 3

1. Value of Security Selection vs. Asset Allocation in Credit Markets 9 2. Value of Skill in Macro Strategies for Global Fixed-Income Investing 52 3. Cost of the No-Leverage Constraint in Duration Timing 109

INDEX REPLICATION 121

4. Replicating the Lehman Brothers U.S. Aggregate Index with Liquid Instruments 133 5. Replicating the Lehman Brothers Global Aggregate Index with Liquid Instruments 163 6. Tradable Proxy Portfolios for the Lehman Brothers MBS Index 188 7. High Yield Index Replication 215 8. CMBS Index Replication 225

BENCHMARK CUSTOMIZATION 235

9. Evaluating Performance of Long-Horizon Portfolios 241 10. Liability-Based Benchmarks: An Example 283 11. Swap Indices 294 12. Benchmarks for Asset-Swapped Portfolios 317 13. Issuer-Capped and Downgrade-Tolerant U.S. Corporate Indices 327

MANAGING CREDIT PORTFOLIOS 353

14. Sufficient Diversification in Credit Portfolios 363 15. Return Performance of Investment-Grade Bonds after Distress 410 16. Optimal Credit Allocation for Buy-and-Hold Investors 430 17. A Quick Look at Index Tails 465 18. Are Credit Markets Globally Integrated? 475

MANAGING MORTGAGE PORTFOLIOS 499

19. Managing against the Lehman Brothers MBS Index: Prices and Returns 503 20. Evaluating Measures of MBS Duration 519 21. MBS Investing over Long Horizons 556

MANAGING CENTRAL BANK RESERVES 579

22. Total Return Management of Central Bank Reserves 583 23. The Prospects of Negative Annual Total Returns in Short-Duration Treasury Benchmarks 621

PART II: Portfolio Management Tools

OPTIMAL RISK BUDGETING WITH SKILL 631

24. Effect of Security Selection Skill on Optimal Sector Allocation 641 25. Risk Budget Allocation to Issuer and Sector Views 655

MULTIFACTOR RISK MODELING AND PERFORMANCE ATTRIBUTION 677

26. The Global Risk Model: A Portfolio Manager's Guide 681 27. The Hybrid Performance Attribution Model 788

PORTFOLIO AND INDEX ANALYTICS 811

28. Insights on Duration and Convexity 817 29. Portfolio Yields and Durations 825 30. Computing Excess Return of Spread Securities 842 31. Currency-Hedged Returns in Fixed-Income Indices 854 32. The Bund-Treasury Trade in Portfolios 862 33. Empirical Duration of Credit Securities 871 34. Duration Times Spread: A New Measure of Spread Risk for Credit Securities 888 35. Hedging Debt with Equity 935