Addressing the problems with traditional fixed income metrics
When it comes to fixed income, there are three key problems with the traditional metrics:
?? Interest rate predictions are inaccurate: Historically, economists’ interest rate predictions have strayed significantly from what actually happened. Over the past 16 years, less than half of all Wall Street economists accurately predicted interest rate movements within 50 basis points of the actual movement in the 10-year Treasury.[1]
?? Yield is insufficient: Yield is one of the most relied upon performance metrics that drives many fixed income investment decisions but is often based on incomplete information and assumptions. For example:
? Is yield total return? No – yield is only equal to total return if the coupons are reinvested at the same yield at which you bought the bond, and it is held until maturity / call date.
? Is yield static? No – yield changes as interest rates change.
? Does yield measure all price drivers? No – it does not.
?? Duration only gives a partial picture: Many investors use duration as their primary risk measure when selecting bonds. But duration is based on assumptions that we believe only give a partial picture and can potentially mislead investors. It also excludes other drivers of bond prices, such as time decay, convexity, optionality, spreads, yield, and credit curve roll.
Nearly 30 years ago, PT Asset Management’s founders recognised the above shortcomings and developed Shape Management, an investment process that addresses each of these shortcomings by analysing the risk- return profile of a bond’s future cashflow.
Learn more about Shape management in our recent webinar with PT Asset Management, LLC CEO Sean Dranfield .
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[1] Sources: www.treasury.gov (Actual 10-Year Treasury) and WSJ Survey of Economists (Average Prediction); predictions as of 1st January of each year except the 2015. Data from 2011-2023.
Sources available upon request.
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