Bridge over ocean
1 May 1983 Financial Analysts Journal Volume 39, Issue 3

Strategies for Enhancing Bond Portfolio Returns

  1. Carol J. Billingham

Because even conservative bond portfolios are necessarily subject to a high degree of interest rate risk, managers must choose from three basic policies: (1) accept the market rate of return despite possible adverse effects on portfolio performance, (2) guarantee the current rate of return, even though the guaranteed rate might be less than the new future rates, or (3) implement strategies that use interest rate changes to improve portfolio performance.

Active bond portfolio managers, desiring to guarantee profits and protect against losses, are likely to implement the third policy. When they expect a downward trend in interest rates, they may wish to combine two strategies—high portfolio turnover to realize capital gains and partial portfolio immunization to retain an existing high rate of return over a given duration. When they forecast an upward trend in interest rates, a strategy of hedging with Treasury bond futures will yield excellent results.

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