Editor’s Letter

As inflation expectations loom large and all eyes are on the Federal Reserve response, we begin this issue of The Journal of Fixed Income with an article by Musa Amadeus, Rajeev Bhargava, Tim Graf, Michael Guidi, Michael Metcalfe, Gideon Ozik and Ronnie Sadka that finds central bank monetary tones from media coverage predicts future yield changes. Their proposed trading strategy on these tones earns 0.56% per week (29% annualized). Next, Riccardo Rebonato and Taku Hatano provide a methodology to predict future Treasury returns as a function of the deviation of the level and slope from long-term inflation expectations. Their evidence indicates that inflation surprises are remarkable predictors of Treasury excess returns.

In the next article, Glenn M. Schultz and Frank J. Fabozzi take a deep dive into the differences in convexity profiles related to servicer business models. Differential prepayment rates in specified pools are clearly identified by bank versus non-bank servicers. Then, Romain Deguest, Lionel Martellini and Vincent Milhau validate increased risk-adjusted performance with enhanced corporate bond portfolio construction holding duration constant. Furthermore, Sharpe ratios relative to competing benchmarks are improved by relaxing the duration constraint.

When does “green” financing add value? In the next article, Karan Bhanot, Christopher Combs and Raj Patel provide evidence that “green” municipal bonds that finance power generation have a price premium, and hence, a lower cost of capital relative to other similar risk municipal green bonds. Finally, John Finnerty recommends adjustments to the SEC Yield calculation to avoid misleading reports for TIPS bond mutual funds and ETFs.

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

Stanley J. Kon

Editor

• © 2022 Pageant Media Ltd