Hi guys.
I can not comprehend one thing about fixed income.
When a manager expects rise of interest rates should’t he/she convert bonds to cash instead of buying bonds with short duration ?
As I uderstand it, short duration is less sensitive to interest rates change, but still - it is better to hold cash instead of bonds.
Could you tell me where I am wrong ?
I don’t see any reason why you’re wrong in theory. But there are plenty of institutional investors who can’t go to cash and have to stay invested as their clients expect that, so the next best option would be to go to short duration. There are plenty of instances in the text where you can hedge your long duration by going to synthetic cash instead.
The key point is we’re getting out of High duration and into Low duration to minimize interest rate volitility.
Cash has little/no rate of return. (except maybe a MM ypte instrument) .
a low duration bond might give a better rate of return with minimal interest rate volitility.
The point is if we’re investing in bonds, then we would want our bonds in a lower duration.
When we say that we invest in cash, what we really mean is that we invest in extremely short-duration bonds; e.g., T-bills.
Same thing.
As usual S200magician is right. Coming from an asset manaement background “cash” is t-bills or good shor term paper. It all has duration, even floaters do with rates where they are. Just forget the idea of cash as the dollars in your wallet. Money in a fund is always invested in someting.
I agree with s2000 and Delta.
Also from a curriculum standpoint, moving to cash completely could be a strategic asset allocation shift, while tactical is probably more appropriate in tilting the portfolio.
That makes sense. Thank you guys!
My pleasure.