garypearson
03-30-2007, 10:21 AM
http://tinyurl.com/2e7p8c from http://yahoo.reuters.com/news/
NEXT UP-U.S. bond index change may kick up selling
Thu Mar 29, 2007 3:39 PM ET
By Richard Leong
NEW YORK, March 29 (Reuters) - Bond fund managers will likely pare some holdings on Friday when the market's main performance benchmark for the first time reduces its principal measure of price sensitivity to interest rate changes.
The duration, or rate sensitivity, of the Lehman Brothers Aggregate Bond Index has lengthened every month since its creation in 1976, often giving the bond market a bit of a bid at the end of each month.
On Friday, however, the duration of the index, the most widely tracked gauge of the $27.5 trillion U.S. bond market, is expected to show an unprecedented contraction ahead of the addition on April 1 of new hybrid mortgage securities. That likely will trigger some selling in bond portfolios to keep them in sync with the Lehman index.
"The market will mirror those changes in the index," said Gary Pollack, head of fixed-income trading at Deutsche Bank Private Banking in New York.
Analysts reckon that bond sales on Friday tied to shorter index duration would exacerbate any volatility that may surface on a day when the schedule of economic releases is heavy.
Leading the data parade is a government report on core personal consumption expenditure. The median forecast on the core PCE, the Federal Reserve's preferred inflation measure, is a 0.2 percent gain in February, following a 0.3 percent increase in January. A higher reading could trigger selling pressure, especially of longer-dated bonds, with the market particularly sensitive to signs of faster inflation.
While there is a variety of maneuvers to shorten a portfolio's duration, selling Treasuries is "the quickest and the easiest," Pollack said, given that U.S. government securities are the most liquid in the bond market.
Behind the change is the introduction of hybrid mortgage-backed securities to the Lehman index. The benchmark measures the performance of investment-grade U.S. debt including Treasuries, agency debt, high-grade corporate bonds and mortgage-backed securities.
"Their duration is so much less than fixed-rate mortgages," said Joseph DiCenso, Lehman's fixed income strategist.
Hybrid MBS have less duration than fixed-rate MBS because they have shorter maturities and their coupon payments adjust to rate changes.
Lehman announced its plan to introduce hybrid MBS into its Aggregate Bond Index about six months ago. Based on early estimates, the Lehman index's duration would be 0.05 year less on April 1 than in early March, DiCenso said.
Money managers whose portfolios are closely tied to the Lehman index may sell certain types of bonds to comply with the expected index adjustment, although the magnitude of the move is anyone's guess.
"To quantify the amount of selling is difficult," Lehman's DiCenso said.
:( :(
Sorry about the long post...I guess the title really says it all.
Gary
NEXT UP-U.S. bond index change may kick up selling
Thu Mar 29, 2007 3:39 PM ET
By Richard Leong
NEW YORK, March 29 (Reuters) - Bond fund managers will likely pare some holdings on Friday when the market's main performance benchmark for the first time reduces its principal measure of price sensitivity to interest rate changes.
The duration, or rate sensitivity, of the Lehman Brothers Aggregate Bond Index has lengthened every month since its creation in 1976, often giving the bond market a bit of a bid at the end of each month.
On Friday, however, the duration of the index, the most widely tracked gauge of the $27.5 trillion U.S. bond market, is expected to show an unprecedented contraction ahead of the addition on April 1 of new hybrid mortgage securities. That likely will trigger some selling in bond portfolios to keep them in sync with the Lehman index.
"The market will mirror those changes in the index," said Gary Pollack, head of fixed-income trading at Deutsche Bank Private Banking in New York.
Analysts reckon that bond sales on Friday tied to shorter index duration would exacerbate any volatility that may surface on a day when the schedule of economic releases is heavy.
Leading the data parade is a government report on core personal consumption expenditure. The median forecast on the core PCE, the Federal Reserve's preferred inflation measure, is a 0.2 percent gain in February, following a 0.3 percent increase in January. A higher reading could trigger selling pressure, especially of longer-dated bonds, with the market particularly sensitive to signs of faster inflation.
While there is a variety of maneuvers to shorten a portfolio's duration, selling Treasuries is "the quickest and the easiest," Pollack said, given that U.S. government securities are the most liquid in the bond market.
Behind the change is the introduction of hybrid mortgage-backed securities to the Lehman index. The benchmark measures the performance of investment-grade U.S. debt including Treasuries, agency debt, high-grade corporate bonds and mortgage-backed securities.
"Their duration is so much less than fixed-rate mortgages," said Joseph DiCenso, Lehman's fixed income strategist.
Hybrid MBS have less duration than fixed-rate MBS because they have shorter maturities and their coupon payments adjust to rate changes.
Lehman announced its plan to introduce hybrid MBS into its Aggregate Bond Index about six months ago. Based on early estimates, the Lehman index's duration would be 0.05 year less on April 1 than in early March, DiCenso said.
Money managers whose portfolios are closely tied to the Lehman index may sell certain types of bonds to comply with the expected index adjustment, although the magnitude of the move is anyone's guess.
"To quantify the amount of selling is difficult," Lehman's DiCenso said.
:( :(
Sorry about the long post...I guess the title really says it all.
Gary