Adjust bond portfolio duration

[Olivia]

Hi,

Any one here has experience adjusting bond portfolio duration without changing the average rating? I want to test our ALM position by changing the asset duration to be 1 greater than original. The problem is by giving different weight to individual bonds in the original portfolio, I'm changing the overall risk spread of the portfolio too. My testing results suggest the best asset portfolio is the one with highest rist spread.

Any idea will be appreciated!

[MathGeek92]

Talk to your investment folks...but I would just enter into a credit derivative. It is generally much cheaper than selling assets.

[Olivia]

Originally Posted by MathGeek92

Talk to your investment folks...but I would just enter into a credit derivative. It is generally much cheaper than selling assets.

Thanks. I don't need to really trade assets, just want to see what the Asset Liability position will be if we increase duration by 1. The thing is I need to avoid changing portfolio default rating and don't see any easy way to do it.

[exactuary]

It sounds like you are using an optimizer and specifying the average credit rating and the duration.

How are you defining the weights in the average credit rating? -- most use the current price.

Because optimizers seek the cheapest price that meets the constraints, they will pick strong short term bonds and weak long term bonds. Think about why this is true.

This means that the portfolio will systematically deteriorate in quality as time goes by even if the ratings on individual bonds never change.