Bond Markets, Analysis, and Strategies (9th Edition)

Book Preface

The objective of the first edition of Bond Markets, Analysis, and Strategies published in 1989 was to provide coverage of the products, analytical techniques for valuing bonds and quantifying their exposure to changes in interest rates, and portfolio strategies for achieving a client’s objectives. In the seven editions subsequently published and in the current edition, the coverage of each of these areas has been substantially updated. Throughout this book there are practical applications of principles as provided by third-party commercial vendors.

Each edition has benefited from the feedback of readers and instructors using the book at universities and training programs. I benefited from many discussions with chief investment officers, portfolio managers, analysts, traders, and regulators, as well as my experiences serving on the board of directors of two BlackRock fund complexes and consulting engagements.

I am confident that the ninth edition continues the tradition of providing up-to-date information about the bond market and the tools for managing bond portfolios.

Chapters New to the Ninth Edition

Chapter 16: Pooled Investment Vehicles for Fixed-Income Investors The chapters prior to this chapter in the book focus on individual debt instruments. This new chapter describes investment vehicles that represent pooled investments and are also referred to as collective investment vehicles. They include investment company shares, exchange-traded shares, hedge funds, and real estate investment trusts. We discuss them from two perspectives: their investment characteristics and their use as part of a bond portfolio strategy.

Chapter 21: Measuring Credit Spread Exposures of Corporate Bonds Earlier chapters in the book explain how to quantify the interest-rate sensitivity of a bond and a bond portfolio to a change in the level of Treasury rates. In this new chapter, the focus is on how to best model credit spread behavior and how to measure exposure to credit spread risk when Treasury rates change.

Chapter 26: Considerations in Corporate Bond Portfolio Management Whereas earlier chapters in the book describe bond portfolio strategies and management in general, this new chapter covers issues associated specifically with the management of corporate bond portfolios. Coverage includes the stability of the investment characteristics of bond market indexes, credit relative value trades, constraint tolerating investing, and how to quantify liquidity risk for corporate bonds.

Chapter 27: Liability-Driven Investing for Defined Benefit Pension Plans The eighth edition of the book had a chapter entitled “Liability-Driven Strategies,” which just described immunization and cash flow matching strategies. That chapter (Chapter 24) is replaced with this new chapter that focuses on liability-driven investing for defined benefit pension plans. The chapter begins with a description of how historically pension plan sponsors incorrectly formulated investment policy by focusing solely on the asset side.

After covering measures used to describe the health of a defined benefit pension plan, liabilitydriven investing strategies are described that take into account their liability obligations. Significantly Revised Chapters Chapter 22: Corporate Bond Credit Analysis (Chapter 19 in the previous edition) Expanded coverage and the addition of two cases—credit analysis and covenant analysis of Sirius XM Holdings Inc. and credit analysis of Sino-Forest Corporation (a commercial forestry company in China)—are provided.

Chapter 24: Bond Portfolio Management Strategies (Chapter 22 in the previous edition) New material on selection of bond benchmarks, problems with market capitalizationweighted bond indexes, customized indexes, alternative bond benchmarks, and smart beta strategies are provided.

Other Noteworthy Changes to Chapters
Chapter 19: Analysis of Residential Mortgage-Backed Securities (Chapter 18 in the previous edition) Two real-world illustrations provided by FactSet are included.

Chapter 23: Credit Risk Modeling (Chapter 21 in the previous edition)
An illustration of how to use risk models in relative value analysis provided by Kamakura Corporation is presented.