21-Bond Portfolio Man Page 649 Wednesday, February 4, 2004 1:12 PM

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CHAPTER

21

Bond Portfolio Management

n this chapter, we look at the more popular strategies for managing a bond

portfolio. A portfolio manager will select a portfolio strategy that is con-

sistent with the objectives and policy guidelines of the client or institution.

As explained in Chapter 1, a portfolio manager’s benchmark can be either a

bond market index or liabilities. In this chapter, we provide an overview of

strategies for managing a bond portfolio versus both benchmarks.

MANAGEMENT VERSUS A BOND MARKET INDEX

There are several bond market indexes that represent different sectors of

the bond market. The wide range of bond market indexes available can

be classified as broad-based bond market indexes and specialized bond

market indexes. The three broad-based bond market indexes most com-

monly used by institutional investors are the Lehman Brothers U.S.

Aggregate Index, the Salomon Smith Barney Broad Investment-Grade

Bond Index, and the Merrill Lynch Domestic Market Index. There are

more than 5,500 issues in each index. One study has found that the cor-

relation of annual returns between the three broad-based bond market

indexes were around 98%.^1 The three broad-based bond market indexes

are computed daily and are market value weighted. This means that for

each issue, the ratio of the market value of an issue relative to the mar-

ket value of all issues in the index is used as the weight of the issue in all

(^1) Frank K. Reilly and David J. Wright, “Bond Market Indexes,” Chapter 7 in Frank
J. Fabozzi (ed.), The Handbook of Fixed Income Securities: Sixth Edition (New
York: McGraw-Hill, 2000).
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