Fixed-Income Portfolio Optimization with Yield, Risk, and Currency Constraints

Summary

The document describes a portfolio manager’s difficulty optimizing a fixed-income portfolio using yield to maturity, duration, and credit rating. The current score favors short-maturity, highly rated US bonds when the yield curve is flat, leaving the portfolio exposed to underperformance when rates fall. The manager asks how to define an objective that balances yield against duration, rating, and currency exposure, and whether a yield-to-risk ratio is appropriate.

The document provides a practical problem statement rather than a proposed model or empirical test. It highlights that optimizing a few security-level attributes can concentrate holdings and may not reflect performance across different interest-rate environments. It asks for references and alternative objective functions, but supplies no evidence comparing candidate methods. A useful formulation would need to clarify benchmark-relative goals, risk measures, currency limits, and how rate scenarios enter the optimization; these are open questions in the source.

Key ideas

• A score based on yield, duration, and rating can concentrate a portfolio in short-maturity, highly rated bonds.
• The portfolio manager wants to include currency exposure in the optimization.
• A flat yield curve can make the current objective favor short-duration holdings.
• The document asks whether yield divided by a combined risk measure is a suitable objective, but gives no answer.

Tags

# How to optimise Fixed Income portfolio (Yieldbook) based on YTM, duration, rating and exchange rate


# How to optimise Fixed Income portfolio (Yieldbook) based on YTM, duration, rating and exchange rate












I have a fixed income portfolio built up in the Yieldbook and BBG Port. However due to some bad performance of my portfolio compared to the benchmark I would like to build up an optimisation which maximise a score such as the ratio (or not necessarily a ratio) between YTM and risk where risk is a function of duration, rating (S&Ps) and exchange rate currency (I want to keep some bonds in local currency and other not). The current simulation only considers YTM, duration and rating, and performs badly when the yield curve is flat because it allocates everything at very low maturity and only in US bond due to high rating. Consequently if the interest rates grow that is beneficial but everytime the interest drop then i keep going short duration and I underperform the benchmark. So my questions are: do you have any reference (paper etc.) on how to formulate such an objective function? also do you think that this score YTM/f(duration, rating, exchange rate) is a proper way to proceed or do you have additional suggestions on how to properly set my objective function? Many thanks

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.