exotic treasury securities as new asset classes+ 567 =.ee ... treasury securities/pipat.pdf ·...

ก��ก��

�Exotic Treasury Securities: Tools for Pricing,

Asset Allocation and Risk Management+

ก��ก��

�Exotic Treasury Securities as New Asset Classes+

567�� =�.E�E?dB< GL� �BFV�:?�

�?BEFG?9�=HDH� 25 ก?B��B 2557 �L� 10.45 O 12.15 B.

G7 � 205 RSTE�S��8�9:�<ULTก��?@H

VG��D��L?�C��V8�9:�< DW�E�T;?BD�<

A member of the

Kiatnakin Phatra Financial Group

1

A member of the


Exotic Treasury Securities as New Asset Classes

Pipat LuengnaruemitchaiHead of PWM ResearchPhatra Securities

September 25, 2014

A member of the


2Agenda.

1. Asset classes in asset allocation

2. Current practice of asset allocation

3. Exotic Bonds—ILB and super long bonds—as new asset classes

September 2014

Exotic bonds and asset allocation

A member of the


3Asset allocation

timeframe

return objectives

risk tolerance

balancing between risk and return

investment strategy

A member of the


4Asset allocation

September 2014


A member of the


5Asset classes in asset allocation

• Assets within an asset class should be relatively homogeneous.

• Asset classes should be mutually exclusive.

• Asset classes should be diversifying.

• The asset class should have the capacity to absorb a significant fraction of the

investor’s portfolio without seriously affecting the portfolio’s liquidity.

September 2014


A member of the


6Example: CalPERS

Asset class criteria:

• Strategic role of the asset class based on fundamental characteristics and risk and return drivers

• Sufficient size, liquidity, cost efficiency to invest; material effect on overall returns

• Availability of investment and technical expertise to ensure prudent implementation of an investment

• Presence of diversification, return enhancement, liquidity provision or other attribute, which enhance the ability to achieve the strategic objectives

• Acceptance by large pension fund sponsors or by academic support as a feasible and meaningful asset class

• Availability of data, history, or expertise to assess the feasibility and benefit of the asset class

September 2014


A member of the


7

September 2014


“We concluded that we would eliminate the hedge fund

program in order to reduce the complexity, reduce the costs in

the program, particularly in relation to our view that given the

scale of Calpers [with assets of $298bn], we would not be able

to scale a hedge fund program to a size that would really move

the needle,” Eliopoulos said today in an interview.

The pension fund paid $135 million in fees in the fiscal year that ended

June 30 for hedge fund investments that earned 7.1 percent,

contributing 0.4 percent to its total return, according to Calpers

figures.

A member of the


8Inflation Linked Bonds

• Coupons and principals

are adjusted for inflation

• Payments tend to be

back-loaded

• The duration is typically

longer than a nominal

bond

September 2014


0

20

40

60

80

100

120

140

160

0

1

2

3

4

5

6

7

8

9

10

1 2 3 4 5 6 7 8 9 10 11

Principal payment at maturity (RHS) = par x index(T)

Coupon payments (LHS)= c x par x index(t)

Inflation adjustments

coupon=2%

Par

=100

10

Index(t) = CPI(t)/CPI(0)

A member of the


9Nominal vs real yield

Nominal yield = real yield

+ inflation expectations

+ inflation risk premium

+ inflation convexity term

September 2014


“Breakeven inflation”

A member of the


10Nominal return of an ILB

Nominal Return = !"# × $%&# + 1 ×'() *

'() *+, 1)

+"-./0 × 12-(3)/12-(3 1)

• Negatively affected by the rise in (real) bond yield

• Positively correlated to inflation shocks

• Relatively low correlation against nominal bonds or stocks (true?)

September 2014


A member of the


11Major Global ILB

September 2014


A member of the


12Complementary asset classes

Rising growth Falling growth

Rising inflation Equities,

commodities, EM

ILB

Falling inflation Equities, bonds Bonds

September 2014


A member of the


13Market vs Model—ILB217A

September 2014


-1.0

0.0

1.0

2.0

3.0

4.0

Jul-11

Sep-11

Nov-11

Jan-12

Mar-12

May-12

Jul-12

Sep-12

Nov-12

Jan-13

Mar-13

May-13

Jul-13

Sep-13

Nov-13

Jan-14

Mar-14

May-14

Jul-14

ILB217A

Nominal Yield ILB-implied B/E

ILB Real Yield (RHS) 12m inflation expectations

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

Jul-11

Sep-11

Nov-11

Jan-12

Mar-12

May-12

Jul-12

Sep-12

Nov-12

Jan-13

Mar-13

May-13

Jul-13

Sep-13

Nov-13

Jan-14

Mar-14

May-14

Jul-14

"Model"

Inflation expectations Inflation premium

Nominal Yield Model B/E

Model-implied Real Yield

A member of the


14Market vs Model—ILB283A

September 2014


0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

Mar-13

Apr-13

May-13

Jun-13

Jul-13

Aug-13

Sep-13

Oct-13

Nov-13

Dec-13

Jan-14

Feb-14

Mar-14

Apr-14

May-14

Jun-14

"Model"

Nominal Yield Model B/E Model-implied Real Yield0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

Mar-13

Apr-13

May-13

Jun-13

Jul-13

Aug-13

Sep-13

Oct-13

Nov-13

Dec-13

Jan-14

Feb-14

Mar-14

Apr-14

May-14

Jun-14

Jul-14

Aug-14

ILB283A

Nominal Yield ILB-implied B/E

ILB Real Yield (RHS) 12m inflation expectations

A member of the


15Efficient frontier: Model-based

stock bond ILB

avg return 18% 7% 8%

sd of return 22% 13% 6%

CorrelationStock Bond ILB

Stock -7% 5%

Bond 12%

September 2014


4%

6%

8%

10%

12%

14%

16%

18%

20%

5% 10% 15% 20% 25%

Stock+Bond+ILB

Stock+Bond

Nominal Bond

Equity

ILB

A member of the


16Actual returns (since July 2011)

SET TRINominal

BondsILB

Average Return 13.3% 5.2% 2.7%

Standard Deviation 17.7% 5.4% 4.9%

Correlation

Nominal bond 20%

ILB 48% 36%

September 2014


0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

Jul-11

Sep-11

Nov-11

Jan-12

Mar-12

May-12

Jul-12

Sep-12

Nov-12

Jan-13

Mar-13

May-13

Jul-13

Sep-13

Nov-13

Jan-14

Mar-14

May-14

ILB

Nominal bond

SET

Source: Bloomberg, Phatra Securities

A member of the


17Low liquidity, but….

Average

Daily

Trading

Value

Outstanding

Size"Turnover" Note

ILB217A 215.1 100,872 0.54 10Y ILB

ILB283A 216.4 77,730 0.70 15Y ILB

LB21DA 1,501.8 181,110 2.09 10Y Benchmark govt. bond when 10Y ILB being issued

LB27DA 244.3 70,780 0.87 15Y Benchmark govt. bond when 15Y ILB being issued

LB283A 57.7 61,950 0.23 Non-benchmark govt. bond

LB214A 44.5 40,000 0.28 Non-benchmark govt. bond

PTTC18NA 19.3 18,049 0.27 One of the most liquid PTT longer term bonds

PTTC243A 21.5 15,000 0.36 One of the most liquid PTT longer term bonds

September 2014



A member of the


18Example from the US market

1-3 3-7 7-10 10-20 20+

SPX Index

TIP US

Equity

SHY US

Equity IEI US Equity IEF US Equity

TLH US

Equity

TLT US

Equity CPI

Average Return 7.9% 5.6% 2.4% 4.9% 6.5% 7.5% 8.9% 2.0%

SD 16.4% 6.9% 1.5% 4.0% 7.0% 9.8% 14.9% 1.2%

SPX Index 100.0% 16.8% -30.2% -32.9% -26.4% -25.7% -32.9% 11.3%

TIP US 100.0% 33.8% 53.8% 62.1% 60.5% 47.9% 6.8%

1-3 SHY US Equity 100.0% 85.8% 66.1% 52.2% 44.6% -16.1%

3-7 IEI US Equity 100.0% 91.6% 80.3% 70.0% -26.5%

7-10 IEF US Equity 100.0% 96.4% 89.3% -31.7%

10-20 TLH US Equity 100.0% 95.6% -32.6%

20+ TLT US Equity 100.0% -33.4%

CPI 100.0%

September 2014



A member of the


19The US TIPS: Liquidity premium?

September 2014


-3

-2

-1

0

1

2

3

4

Jan-02

Aug-02

Mar-03

Oct-03

May-04

Dec-04

Jul-05

Feb-06

Sep-06

Apr-07

Nov-07

Jun-08

Jan-09

Aug-09

Mar-10

Oct-10

May-11

Dec-11

Jul-12

Feb-13

Sep-13

Apr-14

USGGT05Y Index

USGGT10Y Index

USGGT30Y Index

TIPS

-1

-1

0

1

1

2

2

3

3

4

Feb-02

Sep-02

Apr-03

Nov-03

Jun-04

Jan-05

Aug-05

Mar-06

Oct-06

May-07

Dec-07

Jul-08

Feb-09

Sep-09

Apr-10

Nov-10

Jun-11

Jan-12

Aug-12

Mar-13

Oct-13

May-14

USGG30YR Index

USGG30YR Index

USGG30YR Index

Break-even inflation

A member of the


20UK ILB

September 2014


-3

-2

-1

0

1

2

3

4

5

Nov-06

Apr-07

Sep-07

Feb-08

Jul-08

Dec-08

May-09

Oct-09

Mar-10

Aug-10

Jan-11

Jun-11

Nov-11

Apr-12

Sep-12

Feb-13

Jul-13

Dec-13

May-14

5

10

30

50

-2

-1

0

1

2

3

4

5

Nov-06

Mar-07

Jul-07

Nov-07

Mar-08

Jul-08

Nov-08

Mar-09

Jul-09

Nov-09

Mar-10

Jul-10

Nov-10

Mar-11

Jul-11

Nov-11

Mar-12

Jul-12

Nov-12

Mar-13

Jul-13

Nov-13

Mar-14

Jul-14

5

10

30

50

Index linked gilts Break-even inflation

A member of the


2112m rolling correlation

September 2014


-100.0%

-80.0%

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

De

c-0

4

Ap

r-0

5

Au

g-0

5

De

c-0

5

Ap

r-0

6

Au

g-0

6

De

c-0

6

Ap

r-0

7

Au

g-0

7

De

c-0

7

Ap

r-0

8

Au

g-0

8

De

c-0

8

Ap

r-0

9

Au

g-0

9

De

c-0

9

Ap

r-1

0

Au

g-1

0

De

c-1

0

Ap

r-1

1

Au

g-1

1

De

c-1

1

Ap

r-1

2

Au

g-1

2

De

c-1

2

Ap

r-1

3

Au

g-1

3

De

c-1

3

Ap

r-1

4

Au

g-1

4

w/ S&P500

w/ 7-10y nominal bond

12m rolling correlation between US TIPS, SP500 and nominal bonds

A member of the


22Risk: More or less? Depend on your perspective

Nominal benchmark

• Inflation adjustments add another layer of risk factors

• Future payments are uncertain

Real benchmark

• Inflation adjustments ensure preservation of purchasing power

• Performance guaranteed to “beat” inflation (if real yield is positive)

September 2014


A member of the


23Inefficiency of ILB?

September 2014


A member of the


24Are global inflation correlated?

September 2014


A member of the


25Are global inflation correlated?

September 2014


A member of the


26Long maturity bonds: A levered bond?

September 2014


0

5

10

15

20

25

30

35

0 10 20 30 40 50 60 70 80 90 100

Duration

Time to maturity

3%

4%

5%

6%

Time to maturity and bond duration

A member of the


27Perpetual bonds: the UK

Example: UK Consols

Year/Date Description

1751 Consols first issued

1752 Consolidated 3.5% Annuities

1752 Reduced 3% Annuities

1757 Consolidated 3% Annuities

1855 New 3% Annuities

1888 National Debt (Conversion) Act 1888 (Goschen's Conversion)

1888 2¾% Consolidated Stock

1903 2½% Consolidated Stock

5 April 1923 first redemption date

1923 to present 2½% Consolidated Stock

September 2014


A member of the


28Not always a parallel shift…

September 2014


0

1

2

3

4

5

6

7

Jan-02

Aug-02

Mar-03

Oct-03

May-04

Dec-04

Jul-05

Feb-06

Sep-06

Apr-07

Nov-07

Jun-08

Jan-09

Aug-09

Mar-10

Oct-10

May-11

Dec-11

Jul-12

Feb-13

Sep-13

Apr-14

USGG5YR Index

USGG10YR Index

USGG30YR Index

1.00

1.20

1.40

1.60

1.80

2.00

2.20

2.40

Sep-01

May-02

Jan-03

Sep-03

May-04

Jan-05

Sep-05

May-06

Jan-07

Sep-07

May-08

Jan-09

Sep-09

May-10

Jan-11

Sep-11

May-12

Jan-13

Sep-13

May-14

1y

3y

5y

10y

30y

US 5,10,30 bond yield Total return

A member of the


29Example from the US market

1-3 3-7 7-10 10-20 20+

SPX Index TIP US Equity

SHY US

Equity

IEI US

Equity

IEF US

Equity

TLH US

Equity

TLT US

Equity CPI

Average Return 7.9% 5.6% 2.4% 4.9% 6.5% 7.5% 8.9% 2.0%

SD 16.4% 6.9% 1.5% 4.0% 7.0% 9.8% 14.9% 1.2%

SPX Index 100.0% 16.8% -30.2% -32.9% -26.4% -25.7% -32.9% 11.3%

TIP US 100.0% 33.8% 53.8% 62.1% 60.5% 47.9% 6.8%

1-3 SHY US Equity 100.0% 85.8% 66.1% 52.2% 44.6% -16.1%

3-7 IEI US Equity 100.0% 91.6% 80.3% 70.0% -26.5%

7-10 IEF US Equity 100.0% 96.4% 89.3% -31.7%

10-20 TLH US Equity 100.0% 95.6% -32.6%

20+ TLT US Equity 100.0% -33.4%

CPI 100.0%

September 2014


A member of the


30UK YTM

September 2014


0

1

2

3

4

5

6

7

Aug-01

Dec-01

Apr-02

Aug-02

Dec-02

Apr-03

Aug-03

Dec-03

Apr-04

Aug-04

Dec-04

Apr-05

Aug-05

Dec-05

Apr-06

Aug-06

Dec-06

Apr-07

Aug-07

Dec-07

Apr-08

Aug-08

Dec-08

Apr-09

Aug-09

Dec-09

Apr-10

Aug-10

Dec-10

Apr-11

Aug-11

Dec-11

Apr-12

Aug-12

Dec-12

Apr-13

Aug-13

Dec-13

Apr-14

Aug-14

3

5

10

30

50

Perpetual yield

A member of the


31And the UK perpetual bond is similar its 50y bond

1y 3y 5y 10y 30y 50y perpetual

Average 2.4% 3.4% 4.2% 5.4% 6.1% 6.2% 6.1%

S.D 1.1% 2.5% 3.9% 7.2% 11.2% 13.1% 13.4%

1y 100% 78% 64% 46% 31% 23% 32%

3y 100% 93% 74% 57% 49% 57%

5y 100% 88% 72% 64% 69%

10y 100% 88% 79% 82%

30y 100% 97% 91%

50y 100% 91%

perpetual 100%

September 2014


0.6

0.8

1.0

1.2

1.4

1.6

1.8

Sep-01

May-02

Jan-03

Sep-03

May-04

Jan-05

Sep-05

May-06

Jan-07

Sep-07

May-08

Jan-09

Sep-09

May-10

Jan-11

Sep-11

May-12

Jan-13

Sep-13

May-14

1y

3y

5y

10y

30y

50y

perpetual

Risk, return and correlation since 2001


A member of the


32Summary

� Asset classes in asset allocation framework needs periodic reviews

� Inflation linked bonds are a unique asset class, which offer a hedge against inflation and

tend to have low correlation with other asset classes

It had grown in size in many countries around the world, including Thailand

Favorable performance, with low volatility—but now it offers low or even negative real yield in

many cases

Less liquid than traditional bonds

� Investing in long bonds are similar to investing in normal bonds with leverage, with

additional risk from the twist and the curvature of the curve. Perpetual bonds are very

similar to 50y bonds

September 2014


exotic treasury securities as new asset classes+ 567 =.ee ... treasury securities/pipat.pdf ·...

Documents