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Fixed Income – Challenges in a low interest rate environment Maurizio Pedrini April 2010.

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Presentation on theme: "Fixed Income – Challenges in a low interest rate environment Maurizio Pedrini April 2010."— Presentation transcript:

1 Fixed Income – Challenges in a low interest rate environment Maurizio Pedrini April 2010

2 Produced by: APX Date: April 2010 Slide 2/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Contents Opportunities and Threats in 2010 Liquidity: Engineered funds Credit-Spreads: TOPS funds Inflation risk: Inflation-linked funds Appendix

3 Produced by: APX Date: April 2010 Slide 3/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Opportunities and Threats in 2010

4 Produced by: APX Date: April 2010 Slide 4/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Risk/Return Factors in the Fixed Income Asset Class maturity yield credit risk premium liquidity premium real yield inflation premium

5 Produced by: APX Date: April 2010 Slide 5/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. De-leveraging process has just started Source: Arbor Research

6 Produced by: APX Date: April 2010 Slide 6/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Housing market – back to normality? Source: San Francisco Fed

7 Produced by: APX Date: April 2010 Slide 7/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. U.S.A. – Federal Reserve Assets Have Almost Tripled Last data point: Source: Datastream, Credit Suisse / IDC

8 Produced by: APX Date: April 2010 Slide 8/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Long Live the Carry Trade! Source: Arbor Research

9 Produced by: APX Date: April 2010 Slide 9/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Social Security Trust Funds – Buying nothing but U.S. Treasuries Source: SocialSecurityOnline

10 Produced by: APX Date: April 2010 Slide 10/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. U.S. Treasury Bonds Held by Official Institutions Last data point: Source: Datastream, Credit Suisse / IDC

11 Produced by: APX Date: April 2010 Slide 11/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Biggest Part of Budget Deficits in Europe is Structural Source: OECD, Credit Suisse

12 Produced by: APX Date: April 2010 Slide 12/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. EMU Sovereigns – Indebtedness relative to GDP (%) Source: Credit Suisse, Datastream %

13 Produced by: APX Date: April 2010 Slide 13/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. China – Rapid Growth of Monetary Aggregates and Loan Volumes Last data point: Source: Datastream, Credit Suisse / IDC %

14 Produced by: APX Date: April 2010 Slide 14/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Inflation will Remain Tame in the Short Run Source: Arbor Research

15 Produced by: APX Date: April 2010 Slide 15/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Source: Bloomberg, Credit Suisse / IDCLast data point: Expected Changes of Money Market Rates for the Next 12 Months in bp

16 Produced by: APX Date: April 2010 Slide 16/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Opportunities and Threats for 2010 Interest Rates – Interest rates are generally on a low level – risk of a sudden rise – Very steep yield curves mean high opportunity cost of capital – Considerable risks in sovereign bonds (Dubai, Greece,…) Flexibility of chosen strategy is important (liquidity!) Credit-Spreads – Economic recovery helps – what happens when government stimulus gets withdrawn? – Credit spreads are still at historically attractive levels Focus needs to be on issuer selection Inflation – No immediate threat – Expansionary monetary policy and rising sovereign debts pose significant risks in the longer term Inflation risk is not sufficiently discounted by the market

17 Produced by: APX Date: April 2010 Slide 17/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Liquidity: Engineered Funds

18 Produced by: APX Date: April 2010 Slide 18/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Traditional vs. Synthetic Fixed Income Funds (Currency Forward) Interest rate swap Synthetic money market Credit risk Currency risk Interest rate risk Traditional bonds Synthetic bonds + portable alpha Credit default swap Instruments and risks Portable alpha

19 Produced by: APX Date: April 2010 Slide 19/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Synthetic Money Market and Portable Alpha Portable Alpha Strategy – To enhance this money market return, a small part of the fund (5% to 10%) is invested in a portable alpha strategy – This strategy is a mechanical equity index arbitrage strategy which invests in single stocks subject to corporate events (e.g. inclusions/exclusions from an index) and hedges the systematic equity risk with index futures – This means that the fund doesn't have any systematic equity risk, only a small additional volatility coming from the excess returns of the portable alpha strategy Synthetic money market – Cash is invested in a diversified equity portfolio which is immediately sold forward, so that the investor doesnt hold any equity market risk – The money market equivalent return comes from the interest rate implicit in the forward price

20 Produced by: APX Date: April 2010 Slide 20/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Interest Rate Risk and Credit Risk (incl. Counterparty Risk) Interest rate risk: Positioning with respect to the benchmark along the dimensions duration and curve Credit risk is implemented through index CDS (iTraxx) and single name sovereign CDS – Diversification – Liquidity – Credit risk can be quickly eliminated with low transaction costs Counterparty risk is – only a fraction of the notional exposure – diversified across several counterparties (best execution) – subject to limits – constantly monitored – actively managed

21 Produced by: APX Date: April 2010 Slide 21/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Performance Credit Suisse Fund (Lux) Relative Return Engineered (Euro) Expected returns are no forecast or guarantee for future performance. There is no warranty that the expected return can be achieved. Performance data does not include costs and commissions in connection with the purchase and redemption of fund units.

22 Produced by: APX Date: April 2010 Slide 22/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Performance Credit Suisse Fund (Lux) Relative Return Engineered (Euro), (net) Expected returns are no forecast or guarantee for future performance. There is no warranty that the expected return can be achieved. Performance data does not include costs and commissions in connection with the purchase and redemption of fund units. NAV price in %

23 Produced by: APX Date: April 2010 Slide 23/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Credit Spreads: TOPS Funds

24 Produced by: APX Date: April 2010 Slide 24/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Risk-free curve Credit curve maturity yield Traditional Bond Fund TOPS Focus is on Credit Duration Source: Credit Suisse

25 Produced by: APX Date: April 2010 Slide 25/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Credit Spreads USD – AAA to BBB (10 years) Last data point: Source: Bloomberg, Credit Suisse / IDC in bp Expected returns are no forecast or guarantee for future performance. There is no warranty that the expected return can be achieved.

26 Produced by: APX Date: April 2010 Slide 26/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. CDS Spreads of Selected EU Countries vs the U.S. & U.K. Last data point: Source: Bloomberg, Credit Suisse / IDC Expected returns are no forecast or guarantee for future performance. There is no warranty that the expected return can be achieved.

27 Produced by: APX Date: April 2010 Slide 27/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Enhanced flexibility without higher risk Target credit exposure LongShort 100% 30% 100% 30% 130 / 30 concept allows the fund to Maintain credit even when 30% of portfolio is hedged Take net short positions in individual names Increase long positions when credit spreads are expected to tighten materially BUT: No leverage on cash assets No short position overall possible (maximum hedge is 100%)

28 Produced by: APX Date: April 2010 Slide 28/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Key Features Three return dimensions: interest rates, credit and currency Independent management of interest rate, credit and currency exposures Focus on risk control to achieve stable returns and minimize the probability of negative returns Target volatility: 1%-1.5% Modified duration: 0 to 3 Average rating: minimum A3/A- (single positions minimum Baa3/BBB-) Credit duration: 0 to 7

29 Produced by: APX Date: April 2010 Slide 29/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Credit Suisse Bond Fund (Lux) TOPS US$ Expected returns are no forecast or guarantee for future performance. There is no warranty that the expected return can be achieved. Performance data does not include costs and commissions in connection with the purchase and redemption of fund units.

30 Produced by: APX Date: April 2010 Slide 30/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. An Alternative to Reducing The Interest Rate Risk yield Real interest rate Breakeven inflation (= expected inflation + inflation risk premium) Nominal interest rate time Conventionally, the interest rate risk is reduced by shortening the overall duration of the portfolio (move from point A to B). The disadvantage is that the opportunity cost is high as both the real rate and breakeven curves are steep. The loss in carry is equal to be + r, be is the carry loss on the breakeven curve while r is the carry loss on the real rate curve. Alternatively, the interest rate risk can be diminished by reducing only the inflation risk, i.e. moving down the breakeven curve (move from point A to C) while maintaining the real interest rate risk constant at point A'. In that case, the loss in carry is equal to be. A B be A'A' r C

31 Produced by: APX Date: April 2010 Slide 31/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Inflation Risk: Inflation Linked Funds

32 Produced by: APX Date: April 2010 Slide 32/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. How do Inflation-Linked Bonds work? Nominal bonds react to movements in nominal interest rates independently from the source of the change, i.e. real rates or breakeven inflation. Real bonds (ILBs) react only to changes in real interest rates and are immune (protected) against changes in inflation expectations. yield Nominal rate Real rate Breakeven InflationBreakeven inflation Risk premium Expected inflation time

33 Produced by: APX Date: April 2010 Slide 33/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Impact of an inflation shock on the bond markets Source: Barclays Capital Equity Gilt Study Investors erroneously believe they are conservatively invested with government bonds. This is true from a credit perspective, but not from a purchasing power point of view. The real return (adjusted for inflation) was disastrous for bond investors during the last inflationary period. US Treasuries returned -46.5% while UK Gilts lost %!

34 Produced by: APX Date: April 2010 Slide 34/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Efficient Frontier with Inflation Linked Bonds Source: BloombergComparison: Barclays World Government inflation-linked Index unhedged in USD vs Barclays Breakeven Index 100% 0% Efficient frontier % 100% Linkers % -10% -5% 0% 5% 10% 15% 20% 25% 4.5%6.5%8.5%10.5%12.5%14.5%16.5% Portfolio standard deviation Portfolio yield 0% 100% Linkers % Linkers 0% 100% Linkers 40% Linkers

35 Produced by: APX Date: April 2010 Slide 35/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Investors are not Properly Compensated for Long Term Inflation Risk Source: Bloomberg (24th March 2010) NAV price in %

36 Produced by: APX Date: April 2010 Slide 36/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. 10-Year Breakeven Inflation Source: Bloomberg, Credit Suisse / IDC Last data point:

37 Produced by: APX Date: April 2010 Slide 37/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Inflation swaps work like plain vanilla interest rate swaps: The fixed leg corresponds to average inflation expectations at inception of the contract. The floating leg is determined ex post by realized inflation Mechanism of Inflation Swaps Receive Inflation Pay Fixed

38 Produced by: APX Date: April 2010 Slide 38/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Principal Pay Fixed Receive Inflation Nominal Coupon Bond + Inflation-Swap = Inflation-Linked Bond Synthetic Inflation Linked Bonds In the CHF product, we combine bonds denominated in CHF with swaps on European and US inflation. This represents a proxy hedge that works as long as inflation surprises in these markets are correlated with Swiss inflation

39 Produced by: APX Date: April 2010 Slide 39/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. An Alternative to Reducing Interest Rate Risk yield Real interest rate Breakeven inflation (= expected inflation + inflation risk premium) Nominal interest rate time Conventionally, the interest rate risk is reduced by shortening the overall duration of the portfolio (move from point A to B). The disadvantage is that the opportunity cost is high as both the real rate and breakeven curves are steep. The loss in carry is equal to be + r, be is the carry loss on the breakeven curve while r is the carry loss on the real rate curve. Alternatively, the interest rate risk can be diminished by reducing only the inflation risk, i.e. moving down the breakeven curve (move from point A to C) while maintaining the real interest rate risk constant at point A'. In that case, the loss in carry is equal to be. A B be A'A' r C

40 Produced by: APX Date: April 2010 Slide 40/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Source: OECD, Credit Suisse Difference of Inflation – Switzerland, France and the USA FranceUSA EMU (since 1998) Average -2.07%-1.17% -0.97% Standard Deviation3.46%2.55% 0.60% Correlation with Swiss Inflation

41 Produced by: APX Date: April 2010 Slide 41/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Performance Credit Suisse Bond Fund (Lux) Inflation Linked EUR (net) Expected returns are no forecast or guarantee for future performance. There is no warranty that the expected return can be achieved. Performance data does not include costs and commissions in connection with the purchase and redemption of fund units.

42 Produced by: APX Date: April 2010 Slide 42/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Peer Group Comparison Source: Credit Suisse Expected returns are no forecast or guarantee for future performance. There is no warranty that the expected return can be achieved. Performance data does not include costs and commissions in connection with the purchase and redemption of fund units.

43 Produced by: APX Date: April 2010 Slide 43/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Appendix

44 Produced by: APX Date: April 2010 Slide 44/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Portfolio manager:MACS Fixed Income, Zurich Fund Currency:EUR, CHF, USD Benchmark:JP Morgan EMU Traded TR SBI Foreign AAA-BBB JP Morgan GBI USA Traded TR Management fee p.a.:1,00% Issuing commission: As per bank fees ISIN (B tranche):EUR: LU CHF: LU USD: LU Credit Suisse Fund (Lux) Relative Return Engineered () (SFr) ($)

45 Produced by: APX Date: April 2010 Slide 45/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Portfolio manager:MACS Fixed Income, Zurich Fund currency:EUR, CHF, USD Benchmark:Libor 3 months in EUR, CHF and USD Management fee p.a.:EUR 1.00%, CHF 0.50%, USD 0.70% Issuing commission: As per bank fees ISIN (B tranche):EUR: LU CHF: LU USD: LU Credit Suisse Fund (Lux) TOPS () (SFr) ($)

46 Produced by: APX Date: April 2010 Slide 46/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. Portfolio manager:MACS Fixed Income, Zurich Fund currency:EUR, CHF, USD Benchmark:Barclays Euro Govt. Infl-Linked 1-10Y (RI) (09/07) SBI Customized Barclays US Govt. Infl-Linked 1-10Y (RI) (09/07) Management fee p.a.:EUR 1.00%, CHF 0.75%, USD 1.00% Issuing commission: As per bank fees ISIN (B tranche):EUR: LU CHF: LU USD: LU Credit Suisse Fund (Lux) Inflation Linked () (SFr) ($)

47 Produced by: APX Date: April 2010 Slide 47/46 Please see Important Information at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material. This document was produced by Credit Suisse AG and/or its affiliates (hereafter CS) with the greatest of care and to the best of its knowledge and belief. However, CS provides no guarantee with regard to its content and completeness and does not accept any liability for losses which might arise from making use of this information. The opinions expressed in this document are those of CS at the time of writing and are subject to change at any time without notice. If nothing is indicated to the contrary, all figures are not audited. This document is provided for information purposes only and is for the exclusive use of the recipient. It does not constitute an offer or a recommendation to buy or sell financial instruments or banking services and does not release the recipient from exercising his/her own judgment. The recipient is in particular recommended to check that the information provided is in line with his/her own circumstances with regard to any legal, regulatory, tax or other consequences, if necessary with the help of a professional advisor. This document may not be reproduced either in part or in full without the written permission of CS. It is expressly not intended for persons who, due to their nationality or place of residence, are not permitted access to such information under local law. Every investment involves risk, especially with regard to fluctuations in value and return. Investments in foreign currencies involve the additional risk that the foreign currency might lose value against the investors reference currency. Historical performance indications and financial market scenarios are no guarantee for current or future performance. Performance indications do not consider commissions levied at subscription and/or redemption. Furthermore, no guarantee can be given that the performance of the benchmark will be reached or outperformed. The investment funds mentioned in this publication are domiciled in Luxembourg and are in conformity with EU Directive 85/611/EEC of 20 December 1985, as amended, relating to undertakings for collective investment in transferable securities. Representative in Switzerland is Credit Suisse Asset Management Funds AG, Zurich. Paying agent in Switzerland is Credit Suisse AG, Zurich. Subscriptions are only valid on the basis of the current sales prospectus and the most recent annual report (or semi annual report, if the latter is more recent). The prospectus, the simplified prospectus, the management regulations and the annual and semi annual reports may be obtained free of charge from Credit Suisse Asset Management Fund Service (Luxembourg) S.A., Luxembourg, from Credit Suisse Asset Management Funds AG, Zurich, and from any bank in the Credit Suisse AG. Disclaimer


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