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Strategic Fixed Income Investing: An Insider's Perspective on Bond Markets, Analysis, and Portfolio Management


Praise for Strategic Fixed Income Investing

"In Strategic Fixed Income Investing, Sean provides a thoughtful map that allows investors to navigate a complex marketplace during extraordinary times. The structure of his discussion nicely blends a broad overview of this security class with a detailed explanation of important fixed income investing concepts which should make it an investment text with staying power."
—Drew T. Matus, a Senior Economist at UBS

"Sean's clear and concise strategies for the fixed income investor draws on his understanding of how markets work—an understanding that has been informed by and has weathered some of the roughest financial waters this generation has seen. Strategic Fixed Income Investing is a road map for navigating the headwinds that come with this asset class. From goal setting to portfolio building to trade execution—his tested approach is a must-read for asset managers and the sophisticated investor."
—Mary Caraccioli, host of Mary Talks Money on ABC-TV's Live Well Network

"Sean Simko's book Strategic Fixed Income Investing is an easy read for the savvy individual investor and a must-read for all financial advisors. Mr. Simko's book provides an easy-to-follow road map to fixed income investing. As a CPA and financial advisor, I will likely use Mr. Simko's book time and again as a bedrock reference when developing a fixed income strategy for my clients."
—Ryan C. Todd, CPA, Todd & Todd LLP

Sean P. Simko is the Head of Fixed Income Portfolio Management at SEI, and a sought-after expert on fixed income investing and the financial markets. He leads a team of investment professionals responsible for research, analysis, implementation, and ongoing portfolio management of over $7 billion of fixed income strategies. Prior to joining SEI, Mr. Simko was vice president and portfolio manager for Weiss Peck & Greer Investments and was responsible for managing approximately $6 billion in assets through various strategies including short duration, tips, structured products, futures, and currencies. Mr. Simko has appeared on Bloomberg TV and radio and frequently on Money Matters, and he is regularly quoted in the Wall Street Journal and other mainstream publications. He has written numerous articles for financial magazines, including most recently, December's issue of Investment Advisor.

Preface xi

Acknowledgments xiii


The Investing Environment 1


Expect the Unexpected 3

The Model Has Changed 4

Lessons Learned 4

From Bad to Worse 5


Navigating through Troubled Water 7

Debt Ceiling 8

Triple A: Lost, but Not Forgotten 8

Possible, but Not Probable, Consequences 9

Warning Signs 12


Lessons Learned 15

Patterns Emerge 16

Money Markets 18

Treasury Bills, the Favored Asset Class 20

Municipals Felt the Pain as Well 25

Auction-Rate Markets Were Hit Hard 27


Direction in a Sometimes Directionless Market 29

Finding Direction 30


The Fixed Income Investor 35


Define the End Investor 37

Risk 40

Risk-Averse Investor 42

A Problematic Trade? 43

Risk-Taking Investor 44

Define Your Strategy 45

Active Strategy 47


Portfolio Construction 49

Factor 1: Defining Your Risk 50

Factor 2: Aligning Goals 51

Conservative Strategy 54

Moderate Strategy 56

More Aggressive Strategy 56

Factor 3: Portfolio Analysis 59

Reduction of Credit Risk 62

Government Securities 64

Risks to Consider 65

Bottom Line 69


Asset Allocation 71

The Road Map 72

Going Global 76


The Federal Reserve and Central Banks 81

Hawks and Doves 82

The Fed Funds Rate 82

A Short-Term Fixed Income Investor 83

Hooked on Accommodation 83

Deposits with Central Banks 84

What about the United States? 86

FOMC: Look for Clues from the Fed Statement 88

What to Look For from the Fed . . . Clues? 88

FOMC Statement: August 2011 89

QE or Not QE 92

Calming Statements for Investors 93


The Economy and the Markets 95

The Payroll Picture: The Backbone to the Economy 97

Bureau of Labor Statistics Website 97

Inflation: A Fixed Income Investor’s Enemy 103

Consumption: America’s Fuel 109

The Federal Chairman: The Wizard Himself 110


The Yield Curve 111

The Spread 115

The Money Market Arena 116

The Direction of Rates 118

A Steep Yield Curve 119

A Flat Yield Curve 120

An Inverted Yield Curve 121

Listen to the Curve 123


The Ladder and Why You Need One 125

How It Works 126

The Concept 126

The Goal 129

The Long End Poses Challenges 131

The Front End Is Technical 133

Varieties of Short-Term Strategies 133

The Sweet Spot 134

Liquidity 134

Consistent Coupons 137

Why Is Supply Important? 138

Performance and How to Measure It 140

Low-Turnover Dilemma 141

Success of a Strategy 142


Alternatives to a Traditional Ladder Strategy 145

TIPS: The Other Treasury 147

Break-Even Opportunity 148

Consider MBS Pools of Mortgages 150

Consider Corporate Bonds 151

Floating-Rate Notes 153

What Is LIBOR? 154

A Deeper Look at LIBOR 154

The Bottoming Process 156


Credit Analysis 159

The Agency 159

Credit Analysis: Necessary, Not Optional 160

Credit for a Passive Strategy 161

After the Initial Approval 163

Not All Bonds Are Equal 164

Stay Ahead of the Herd 166


The Four Pillars of Trade Execution 169

The First Pillar: Executed Price 171

The Second Pillar: Dealer Inquiries 173

The Third Pillar: Liquidity 174

The Fourth Pillar: Ease of Transaction 174


There Are No Roadblocks, Just Detours 177

Know What You Own 177

Banking Sector 178

Go with Your Gut! 179

Don’t Take It Personally 181

Trapped in Purgatory 182

Index 185