Steven Manson, BBH's chief mortgage backed securities analyst, explains how to reap the rewards this complicated sector has to offer and sidestep its most common risks.
Earn 30 percent more on your investments without taking extra risk!
No, that isn't some Internet spammer's come-on. It's a result I just produced, on paper at least, running a random test of an under-appreciated money management technique.
The name of this commonplace activity, rebalancing, will never set pulses pounding. It can perform interesting feats nonetheless.
Hopes for change in the credit ratings industry in the near term were dashed yesterday after US regulators said they remained undecided whether to regulate more closely the ratings agencies or stop overseeing them altogether.
Last September, we described the problems with credit rating agencies, and concluded that even though credit agences are a critical cog in the process,
Inasmuch as the competencies and quality of credit judgement are frequently no greater within the credit rating agencies than they are without, the financial markets must determine whether the agencies continue to be the most accurate and efficacious way in which to determine creditworthiness.
Print media have focused substantial attention on asset-backed securities (ABS) ever since their introduction in 1989. Much of this attention has not been favorable, some because of legitimate concerns about the complexity of this broad market and others due to...
Recent accounting irregularities and the crisis in the pension plans have caused a hardening of the D&O market, reports the Financial Times:
US company directors' security blanket - otherwise known as directors and officers liability insurance - is looking increasingly shredded these days.
The latest hole in coverage: small print that invalidates the policy if the director's company restates its published figures - exactly the point at which board members might need the insurance against lawsuits.
Meanwhile,
Actuaries are facing soaring increases in the cost of their professional indemnity cover, as insurers become increasingly alarmed by the profession's exposure to the pensions crisis.
Marsh, the world's biggest insurance broker, said UK actuaries were being confronted with four-fold increases in the level of their professional indemnity premiums and "retentions", the amount of any claim they have to pay themselves.
Since about 1970, investors have increasingly relied on private insurers to guarantee the timely payment of both principal and interest on municipal bonds. Over this period, the number and total value of outstanding insured municipal bonds has grown dramatically and...
Excesses in corporate arrogance, greed, and optimism, as well as in equity valuations, were wrung out in 2002 to establish a new base from which to begin the next economic and market cycle. Risk avoiders fared well, but risk takers...
(part III of three, continued from Part II) With the benefit of hindsight, we can all see the equity valuation bubble that began to burst in March 2000. Without the benefit of hindsight, it is difficult to estimate the magnitude...
(part II of three, continued from ">Part I) In order to explain the volatile behavior of the financial markets over the last few years one might well point to a series of large events—the Russian Debt default and the Long-Term...
(part one of three) Physicist Werner Heisenberg noted that in order to measure or "see" the position of a particle, a physicist has to literally bounce other particles off of it, thus altering the measured particle's velocity. His statement — "the...
"Everyone bought real estate; and everyone was 'a real estate man' either in name or practice. The barbers, the lawyers, the grocers, the butchers, the builders, the clothiers--all were engaged now in this single interest and obsession. And there...
Despite recent announcements from numerous companies regarding their plans to "expense" options, the controversial issue is not whether or not stock option grants to employees should be charged against earnings as expenses. Rather, the real question is if the current method most companies use understates the value of the options issued and, hence, causes reported earnings to be overstated.
Fixed Income Just as the unprecedented surge in energy prices in the early 1970s initiated enormous economic adjustments and policy challenges, the unwinding of the late 1990s excesses has initiated a different set of economic adjustments and policy challenges....
When a portfolio manager considers adding a corporate bond to a portfolio, that manager will review the financial statements of the bond issuer. Logically, this review begins with analysis of the income statement and a determination of whether the issuer's...
Duration measures the sensitivity of price to a change in yield. Given that movements in the level of interest rates is the primary factor in determining bond returns, the portfolio duration relative to its benchmark is the most important factor in determining the riskiness of a portfolio. However, for Inflation-Indexed Securities (IIS), we are interested in the sensitivity of the price to both the real yield and the nominal yield.
Once you have selected an asset allocation, you may think your job is done. However, the first holdings report you receive will have an allocation different from the approved allocation. Because different sectors have varying returns, the allocations will move...
Asset quality issues have not yet stabilized in the bank sector as recent telecom woes at JPMorgan Chase remind us that asset quality ratios will continue to deteriorate in the third quarter. Despite higher credit losses at JPM, bank spreads...
As recent events in the fixed income capital markets have spectacularly shown, ratings agencies are as prone to misjudgment as any other entity. While this phenomenon is not new, perhaps it has never seemed so pervasive. And never have the...
Ah. It's that time again. Fair Persephone is preparing to return to her Hades home, the tots are off to their enlightenment, and the Hamptons have shorn their seasonal plumes. September's coming also represents the tail end of the critical...
This paper presents a new method of estimating an MBS duration that corrects for the non-linear distortion in the convex price/yield relationship caused by the prepayment option. Our model is a two-state, logistic smooth transition autoregressive (LSTAR) model that adjusts price changes to reflect the changing price/yield relationship.
As John Maynard Keynes so eloquently stated, "Recessions catch what the auditors miss". This time around the recession also caught an auditor (Arthur Andersen). If coming out of a spectacular stock market bubble is akin to a nasty hangover, then...
Smaller capitalization equities have a bit of a split personality when viewed in the context of the broad portfolio allocation decision. Though the marketplace has chosen to distinguish equity products according to capitalization ranges and style biases, these distinctions are...
Fixed Income Recent weakening GDP statistics have resulted in growing expectations of easier monetary policy. At its last meeting on August 13th, however, the Federal Open Market Committee kept official rates unchanged, but did signal in its public statement that...
Every scandal has its poster children. For some reason, the lack of income statement accounting for executive stock options has become the scapegoat of choice for the most recent wave of corporate scandals. Former JPMorgan executive Walter Cadette declared in a recent New...
During the past two years, BBH has opportunistically utilized index total rate of return swaps in the Broad Market Fund. These swaps remain one of the most important derivative instruments in our portfolio management toolkit. An index total rate of...
We present an OAS model to help analyze subordinate classes of credit card-backed bonds. We focus on the MBNA and Citibank master trusts. Bonds issued off of these trusts are separated into three tranches (A, B and C pieces) with subordination manifested in the way that future cash flow allocations are disbursed. We start by defining terms anddescribing key aspects of the cash flow waterfall. We then describe how an option-adjusted spread can be calculated for these types of bonds.
Insurance Institutional Insurance Institutional Insurance companies can gain a competitive advantage by selecting an asset allocation that complements the firm’s business objectives. It is important to choose an investment strategy uniquely optimal to the company’s goals and one that...
Fixed Income Relative to the end of the first quarter, signs of an economic recovery in the U.S. have become less clear in recent weeks. As a result, market expectations for tighter monetary policy have waned. With inflation continuing to...
