In order to manage duration, we first establish an overall forecast for the direction of interest rates based on a top-down view using macroeconomic and technical analysis. This analysis includes:
- A forecast for the direction of the Canadian and global economies.
- An assessment of short term domestic and global economic trends.
- A projection of inflation expectations.
- A review of market sentiment.
Once we project where interest rates are headed – up or down - we’ll decide whether to go long or short relative to the benchmark’s duration. If we expect interest rates to rise, we will create a portfolio with a duration which is shorter than the benchmark’s duration. If we expect rates to fall, we will have a longer duration than the benchmark. As active managers, we are always longer or shorter by at least half a year and by at most two years.
We actively manage our investments along the yield curve. We’ll sometimes buy bonds that all mature at around the same time (“bullet” strategy). Or we’ll split the portfolio into two sets of maturities (“barbell” strategy). Or we’ll spread out the maturities over many years (“ladder” strategy).
Our yield curve strategy involves evaluating the economic and monetary outlook and its expected impact on all segments of the yield curve. By using computerized programs such as PC Bond, we can look at yield curve changes at similar points in past economic cycles in order to help us project future changes.