Editor’s Letter

We begin this issue of The Journal of Fixed Income with two interesting policy articles. First, Chao Gao and John J. McConnell examine the results of shifting mortgage default risk from taxpayers to private investors. The extraordinary returns to investors since inception of the program has provided significant compensation for all tranches of these credit risk transfer securities. The second policy issue is also motivated by the financial crisis of 2008 and its associated financial institution counterparty risk. Issouf Soumaré employs a multifactor econometric model to identify and analyze factors explaining credit value adjustment spreads. Furthermore, the impact of these variables increased with contract maturity.

Managing a foreign bond portfolio for domestic investors involves the often-ignored exchange rate risk that occurs with less than perfectly positively correlated interest rates. In the next article, Zvika Afik, Gady Jacoby, and Zvi Wiener provide a two-factor empirical duration model for this purpose that significantly improves bond price predictability. Next, Louis Ederington and Wei Guan investigate surprises (relative to analyst forecasts) of monthly total non-farm payroll reports on U.S. Treasury securities. They find that the market responses are unbiased and partially resolve uncertainty about future interest rates.

It is well established that default risk information is reflected in market prices faster than ratings from credit agencies. In the next article, Colin Ellis, Kumar Kanthan, and Veronica Zheng examine how market signals and ratings differences eventually converge. Interestingly, they find market signals move more frequently toward ratings, on average. Finally, Mark Johnson, Karyl Leggio, and Yoon S. Shin study the performance of credit risk models from Bloomberg and Standard & Poor’s on Rule 144A straight and convertible corporate bonds. Generally, they find Bloomberg models are superior to Standard & Poor’s at determining yields and predicting actual defaults.

We hope you enjoy this issue of The Journal of Fixed Income. Your continued support of the Journal is greatly appreciated.

TOPICS: Fixed income and structured finance, fixed-income portfolio management, portfolio theory

Stanley J. Kon

Editor

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