Question

In its white paper titled “Investing in a Rising Rate Environment,” Baird’s Private Wealth Management Research team suggests that active bond managers have available 5 broad active investment strategies. They specifically cite both: Duration Management and Yield Curve Management. Explain in detail the difference between the two strategies. Please explain the difference between the two strategies duration management and yield curve management. They are similar but also different.

Answer 1

The prospect of the first US rate rise in almost a decade has caused many government bond investors to believe that they now face declining or negative returns. Bond yields and prices move inversely, which means that if rates do rise, and yields rise in tandem, then bond values would fall.

By focusing on duration, or the amount of time before the bond matures, investors can adjust the interest rate-sensitivity of their holdings. Shorter-dated bond values are generally less sensitive to rate rises than longer-dated ones.

Duration management quantitative model as its sole performance driver. An overlay of liquid interest rate futures is added to an underlying portfolio of global government bonds to steer the duration profile of the portfolio. The model predicts interest rate moves in the three main bond markets; Germany, Japan and the US. The strategy was designed to be able to strongly benefit from falling interest rates and protect against rising interest rates.

Active yield curve strategies are designed to capitalize on expectations regarding the level, slope, or shape (curvature) of yield curves. This reading focuses on the challenges of developing and implementing active fixed-income portfolio strategies for which the primary tools are based in the dynamics of yield curves. In most instances, we have chosen to illustrate the strategies and dynamics using the US Treasury curve because of data availability. These same strategies, however, can be implemented in any jurisdiction with a well-developed sovereign debt market—a market where there are regular bond issuances along the yield curve and the market is liquid.

Here is the diffrances between both stretergy

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