The Journal of Fixed Income

Price Pressure and Price Discovery in the Term Structure of Interest Rates

2025-02-19T11:16:34+00:00

We use a latent factor term structure model to decompose U.S. Treasury yield
curve movements into a transitory, price pressure e ect due to dealer inventories
and a virtually permanent change related to order flow. Dealer inventories are
important in explaining yield curve dynamics with futures exposure at the the
short-end of the yield curve having less price pressure e ect than cash exposure.
Price discovery in the level and the slope of interest rates is linked more to long-
term Treasury futures than long-term Treasury cash securities.

Understanding the Equity-Corporate Bond Nexus: A Framework for Risk Decomposition and Interest Rate Hedging

2025-03-02T09:22:07+00:00

This study explores the complex dynamics between equity and corporate bond markets, focusing on their correlation's decomposition into credit risk and interest rate sensitivity components. By utilizing equity-credit default swap and equity-sovereign bond correlations, this research identifies macroeconomic factors—such as growth and inflation uncertainties—that influence these interactions across different credit qualities and market regimes. Empirical findings reveal significant variations in the equity-corporate bond correlation during periods of market stress and rising interest rates. Additionally, we propose two novel dynamic hedging strategies, leveraging adaptive hedge ratios to isolate credit risk while mitigating interest rate exposure. The results demonstrate that these strategies outperform traditional approaches, offering robust tools for portfolio management amidst fluctuating economic conditions.

Testing an Arbitrage Strategy between FLOT Floating Rate Bond ETF and LQDH Interest Rate Hedged Corporate Bond ETF Securities

2025-03-15T09:57:09+00:00

The study focuses on analyzing the risk and return profiles of two categories of fixed-income bonds, FLOT Floating Rate Bond ETF and LQDH Interest Rate Hedged Corporate Bond ETF. Because of their similarity, they are particularly amenable to an analysis of whether they are correctly priced relative to each other.

Assuming credit-risk is identical across these two instruments, market-efficiency theory suggests their relative return should reflect their relative duration, the sensitivity to changes in interest rates. Applying the theory to regression- and arbitrage-based empirical tests, we find the instrument with the superior Sharpe Ratio does deliver superior returns.

An Empirical Study of the Chen-Hsieh-Huang Model

2025-05-06T04:33:57+00:00

The market of Swaptions is the largest option market in the financial world. The market is liquid and serves as a benchmark for other exotic interest rate derivatives. As a result, a fast valuation algorithm is essential to the valuation of swaptions. In a recent article, Chen, Hsieh, and Huang (2017) derive a closed-form solution to the at-the-month swaptions by assuming a deterministic log-normal volatility process.

This facilitates an empirical investigation similar to the Black-Scholes model from which one can easily and efficiently extract implied volatility information from the at-the-money swaptions. Also similar to the empirical research of the Black-Scholes model, one can use the implied volatility extracted from market swaption prices to gain insight toward the swap market (e.g. prediction of swap rates and volatility).

In this paper, we do exactly that. Using at-the-money swaption data from January 2007 to June 2020, we first extract the CHH-implied forward volatility surface of the at-the-money swaptions. Then we perform a series of tests of its predicative powers. We discover that the CHH-implied forward volatility outperforms substantially the Black-implied volatility in predicting future bond returns, although it is indistinguishable from the Black-implied volatility in predicting the yield curve.

TTHE STRATEGIC EVOLUTION OF PRIVATE DEBT

2025-05-16T14:50:57+00:00

Private debt has emerged as a vital component of institutional portfolios, offering the potential for attractive returns and diversification in a low-yield world. However, its increasing scope demands a broader framework for evaluating risks and opportunities. This paper explores how private debt is evolving in response to rising demand for Environmental, Social, and Governance (ESG) integration, the drive toward financial inclusion, heightened macroeconomic volatility, and the strategic importance of emerging markets. Drawing on insights from past financial crises, regulatory shifts, and technological innovation, we present a roadmap for aligning private credit strategies with the emerging imperatives of sustainable and resilient capital deployment. We argue that private debt is no longer merely a return-seeking asset class but a mechanism for advancing broader societal and policy objectives in an increasingly uncertain world.