Models & Technicals - Wholesale Banking - Home

More documents

Recommendations

Info

Models & Technicals1 July 2010Bond Portfolio Optimisation Model The Optimal Portfolio under-performed the indexover the period by 4.7bp of relative value. For the coming fortnight the Optimal Portfolio hasmoved to a neutral duration position. The RBNZ raised rates as expected and we seefurther hikes ahead. The drama in Europe continues The portfolio is overweight 04/13, 04/15 and 12/17NZGS and underweight 11/11 and 05/21 NZGS.Optimal Portfolio PerformanceThe Optimal Portfolio under-performed the index by4.7 basis points of relative value over the period.This under-performance reflected our duration positionwhich was short and the strong rally in global markets.The strong rally reflected renewed concerns about globalgrowth and the perilous state of European sovereigndebt. Equity markets have slumped once again, creditspreads are under pressure and bank funding concernsare re-emerging. US consumer confidence has slumpedand concerns about China’s growth are growing.These heightened fears saw bond markets rally stronglyand equities slump. NZ’s relatively high yields on a globalcomparison saw offshore aggressively invest in the midto long end of the swap curve, with particular focus onthe higher yielding forward curve and this pushed yieldslower. Our short duration position impacted performance.The yield curve shift accounted for 4.8bp of underperformanceas yields were on average 19bp lower.Optimal Portfolio Fortnightly Performance AttributionPortfolio ReturnSource of ReturnIndexOptimal ValuePortfolio AddedTime 17.7 bps 17.8 bps 0.0 bpsYield Curve Shift 1 76.2 bps 71.4 bps -4.8 bpsYield Curve Shape Change 5.1 bps 5.3 bps 0.2 bpsTransaction Costs 2 -0.1 bps -0.1 bpsTotal 99.1 bps 94.4 bps -4.7 bps1 Parallel curve shift of: -19 bps2 For bond transaction costs of: 0.5 bpsThe NZ Fixed Interest Portfolio Optimisation ModelThe probability weighted for the NZGS yield curve is usedas the basis for our portfolio optimisation model.In optimising our fixed interest portfolio the followingconstraints are imposed:1. No short positions in any maturity.2. Maximum allocation to any individual maturity is 30%of the portfolio.3. Portfolio duration must be within one year of index.4. Our portfolio is only permitted to invest in Trade NZGS.The yield curve change accounted for 0.2bp ofout-performance as long bonds rallied more and theyield curve flattened. Transaction costs were 0.1.Portfolio OptimisationFor the upcoming period we have moved to a neutralposition. Once again turmoil looks to be envelopingthe markets globally. Global growth and deflation fears,sovereign risk fears in Europe and the ability of banksto access sufficient funding is once again dominatingmarkets’ attention. Equities have slumped around theglobe, economic data is disappointing, Moody’s haveput Spain’s Aaa rating on review for downgrade, andcentral banks are again talking about further QE and risksaround deflation!The weak global outlook has many questioning thewillingness of the RBNZ to continue on its intended pathof rate hikes. While many expect further hikes (as we do)the level the RBNZ may take rates too is under scrutinyand with the increased global concerns the market ispushing this level lower.These are not markets we wish to take an aggressive viewin so have moved to a neutral position.For the upcoming period the Optimal Portfolio moves toa neutral duration position versus the index of -0.02 basedon the weighted average of our forecasts. The portfoliois overweight 04/13, 04/15 and 12/17 and underweight11/11 and 05/21 NZGS.YieldComparative Yield Curves6.50%6.25%6.00%5.75%5.50%5.25%5.00%4.75%17-Jun-104.50%4.25%1-Jul-104.00%3.75%3.50%1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0 12.0 13.0Maturity (years)30%25%20%15%10%5%0%NZGS Optimised Portfolio Maturity AllocationIndexOptimisation11/11 4/13 4/15 12/17 5/21Maturitywww.research.bnz.co.nzPage 2
Models & Technicals1 July 2010The Optimal Portfolio characteristics show a 5.9bprunning yield relative to index. The table belowcompares the characteristics of the Optimal Portfolioto that of the index.Portfolio CharacteristicsIndexOptimalPortfolioDifferenceYield 4.51% 4.57% 5.9 bpsMaturity 5.02 yrs 4.85 yrs -0.17 yrsDuration 4.17 yrs 4.15 yrs -0.02 yrsPV01 $433 $432 -$2Repo Benefit 46 bps 47 bps 2 bpsThe following chart shows the Optimal Portfolio’scumulative performance versus the bond index. There isno enhancement from credit. It is purely a Governmentbond portfolio. The optimal portfolio performance includestransaction costs.Accumulated Portfolio OutperformanceVersus Index Returns7.5%7.0%6.5%6.0%5.5%5.0%4.5%`4.0%3.5%3.0%2.5%2.0%1.5%1.0%0.5%0.0%-0.5%Jan-02 Dec-02 Jan-04 Jan-05 Feb-06 Feb-07 Mar-08 Mar-09 Mar-10greg_cotterrell@bnz.co.nzwww.research.bnz.co.nzPage 3
Page 4 and 5: Models & Technicals1 July 2010Yield
Page 6 and 7: Models & Technicals1 July 2010FX Mo
Page 8 and 9: Models & Technicals1 July 2010Table
Page 10 and 11: Models & Technicals1 July 2010New Z

Models & Technicals - Wholesale Banking - Home

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?