Posts

US Treasury Yield Peaks at 15.78%, 40 Years Ago

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  20-Year US Treasury yield peaked at 15.78% on September 30, 1981 and then fell by a 100bps over the next 6 days, noted Jason Zweig of the Wall Street Journal in a very instructive article “The Biggest Day in Bonds That No One Noticed”. The main takeaway from the article was the extraordinary uncertainty that financial markets are capable of demonstrating; whether it is in following trends longer than expected or reversing trends when least expected. Corporate bonds yield almost doubled in four years, from 7.92% to 15.49% from September, 1977-1981. There was little interest in long-term bonds since investors were expecting interest rates to keep rising, and even short-term money-market funds were yielding 17% or more. But things changed on October 1 st , 1981. The long-term interest started falling and registered 50% decline in 5 years, by September 30, 1986. So are we at another such moment today, 40 years later? And maybe we’re about to witness of the long reign of ultra-low int...
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Event-driven Trading Strategies

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  Event-driven trading strategies take advantage of temporary mispricing in securities on account of, or in anticipation of a corporate or market event including Fed action, debt / corporate restructuring, merger and acquisitions, FDA approvals / new product announcements, law suits including anti-trust proceedings, change in government regulations and tariffs. Potentially, there could be huge returns resulting from the temporary dislocation in event-driven security prices. However a successful execution of this strategy requires thorough due-diligence, expertise in the corporation’s primary industry, knowledge of the market and geographic region of operation, and considerable legal expertise. The risks associated with this strategy include: Returns are dependent on successful prediction of catalyst events to occur as forecasted, and in timely fashion.  Changes in the event status or delays could adversely affect the security prices, and  consequently the expected ret...
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Duration Targeting for Fixed Income Portfolios

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I came across an interesting paper that formalizes the benefits of duration targeting in managing Fixed Income portfolios. Here’s a  podcast interview with one of the authors   Martin L. Leibowitz . The one neat result of his research, as he describes it, is that: after a period of 2 x targeted duration, the portfolio’s annualized yield will end up with what you started with irrespective of the volatility in between. I want to quickly check this result so created and back-tested a portfolio using PORT in Bloomberg. I was really interested to see if a Duration targeting portfolio does outperform a “buy and hold” variety. This was not meant to be a holistic result verification, but a quick trial/check. So I created two portfolios Port A] Duration Targeting Portfolio.  Used PORT Optimization and Back-Testing to arrange this portfolio. Targeted Duration was 5years. So I had to analyze over a 10 year period. I selected 2010-2019-end. Port B] Buy and Hold Portfolio compris...
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Hedge Funds Lead Sector Rotation

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The week of July 19 th has seen massive volatility in equities. The major indices saw a huge drop on Monday, the 19 th  due to fears of COVID Delta variant and stalling growth. But ended the week with all major indexes making record highs.  There has been a lot of discussions on market rotations and growth vs. value debates have filled the news media. Here’s a quick look at some charts to map movement from small-mid cap stocks to large cap, and value vs. growth over the last few months. We’ll see this against the backdrop of 10-year treasury yield. Hedge Funds started this rotation in April : In my previous blog  13F Analysis with Bloomberg Port , I’ve analyzed 2021Q1 13F filings of Hedge Funds. I split the equity filings into three groups - the new-buys, selloffs and no-change stocks.  I combined the new-buys and no-change equities common across 2 or more hedge funds into single portfolio (calling it FLNG_Q121_1), and analyzed it using Bloomberg PORT.  ...
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Triple-Witching Friday or is it Quad-Witching?

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  Friday June 18 th was Triple-Witching Friday for equities as it experiences a huge volume spike in trading due to the confluence of three events ·          Expiration of single stock options ·          Expiration of Index Futures ·          Expiration of Index Options This happens yearly on the 3 rd of March, June, September and December. Stock option expiration may require stock delivery resulting in increased trading. While index futures and options are cash settled, all the open interest in derivatives require market makers to hedge positions with equities, that now needs to be closed, again resulting in heaving trading.       Also to take advantage of this liquidity spike, some of the major indexes (below) also rebalance on these days. Index rebalances result in an additional 40% * Market-On-Close flow due to index funds. This addit...
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13F Analysis with Bloomberg PORT – Part 3

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  I’ve been analyzing the Q1 13F filings of Hedge Funds. In the last blog I split the equity filings into three groups - the new-buys, selloffs and no-change stocks, to study any mean differences across various fundamental and technical factors. But I couldn’t find any discernable (statistically significant) differences. Next I combined the new-buys and no-change equities common across 2 or more hedge funds into single portfolio (calling it FLNG_Q121_1), and analyzed it using Bloomberg PORT. Here are couple of screen grabs. I made the portfolio equal-weighted for simplicity. I could have weighted the equities based on overall positions from all hedge funds. Also, I have back-dated the portfolio to April 1, 2021. This way we can measure the returns and other factors starting Q2, approximately after most of these decisions were made. Of course, many of these positions could be longer term, so comparing two month returns against S&P500 may not demonstrate potential accurately. I...
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13F Analysis – Part 2

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  I’ve been analyzing the Q1 13F filings of Hedge Funds. In the last blog we looked at the top new equity buys and selloffs of hedge funds. We also analyzed them by sector to observe that Energy, Industrials, Health Care and Financial showed strong support pointing to strength in cyclicals and reopening play. Next my goal was to analyze the new-buys, selloffs and no-change stocks with various fundamental and technical factors to find any commonality. But I was not able to find any discerning differences in the respective means for those factors across these three groups – NewBuys, SellOffs and Static (no-change). I combine NewBuys and Static as one to see if there is any difference against SellOffs, and couldn’t find anything significant. Next I considered high conviction new-buys and selloffs – meaning equities that have 2 or more buyers or sellers. Still no significant difference. Here are some results. Chart 1 – Boxplot of last 3 month returns for the 3 groups NewBuys, SellOff...
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