Spread Risk and Default Intensity Models

Credit Spread

How Default Intensity Models Relate to Bond Valuation

Cumulative Probability Functions

Average Default Intensity Formula

Derivation of the Hazard Rate Curve

Default Intensity Model Notes

Downward Sloping Spread Curves

Conclusion

Learning Objectives

Protecting against the erosion of the purchasing power of your investment

How investors interpret the DV01

When Interest Rates Fall

Effective Duration

Applying Duration

Calculating the Duration Effect

Callable bonds

How to form a bond portfolio

When the Yield Curve Flattens

Press Conference

Economy and Inflation

Inflation

Financial and Monetary Conditions

Raise all Three Interest Rates by 50 Basis Points

Balance Sheet Normalization

Elements of Current Inflation Developments You'Re Most Concerned by

Energy Cost

Core Inflation

Your Course of Action Is Basically in Line with a Soft Landing

Kirby R. Cundiff, Ph.D., CFA, CH

Day Count Conventions in the U.S. (Page 135-136)

Treasury Bond Futures Pages 138-143

Eurodollar Futures (Page 143-148)

Formula for Contract Value equation

Forward Rates and Eurodollar Futures (Page 143-145)

Extending the LIBOR Zero Curve

Duration Matching

Duration-Based Hedge Ratio

Liquidity Risk

In his webcast titled “Cave People” in reference to the philosopher Plato’s “Allegory of the Cave,” DoubleLine CEO Jeffrey Gundlach.on March 12, 2023, briefly reprises his outlook on the federal debt spiral before reviewing other macroeconomic and market topics, including recessionary “storm clouds.” Notably, while the government’s establishment survey has resilient nonfarm payrolls, Mr. Gundlach marshals evidence showing “the rubric that there’s this booming employment economy is contradicted by other areas.” Among subjects addressed in the webcast, Mr. Gundlach covers

Federal deficit and national debt spiral

Massive COVID-19-era monetary stimulus as explanation for the absence (to date) of recession

Protracted inversion of the U.S. Treasury yield curve

Weakening consumer confidence

U-3 unemployment rate exceeding 12-month moving average and nearing 36-month MA

Questionable veracity of once-trustworthy economic statistics due to plunging survey response rates

Recessionary divergence between cyclical and noncyclical employment

Deteriorating hiring plans at small businesses

Falling average weekly hours worked in manufacturing. “First they cut the hours, and then they cut the bodies.”

Signs of stress among consumers, growing usage of credit cards and a 600-basis point rise to a “punishing” 23% in the average interest rate on credit card debt as forerunners of a future pullback in consumer spending

Inflation as gauged by headline and core CPI

Housing component of CPI versus the Zillow Rent Index and prospects of lower rents due to a construction boom in multifamily housing

Inflation as gauged by headline and core PCE

Inflation as gauged by export and import prices

Commodity prices signaling weak global growth

Review of the Treasury market and a warning regarding narrow credit spreads in high yield corporate bonds

Year-to-date performance of the credit sectors of fixed income, including market pricing of future defaults in CCC corporate bonds

Still-wide spreads on Agency mortgage-backed securities amid discount prices on these securities

AAA spreads compared across non-Agency commercial mortgage-backed securities (CMBS), collateralized loan obligations and corporate bonds

Attractive CMBS versus corporate bonds across AAA, A and BBB cohorts, with warnings against index investing in CMBS

Emerging markets fixed income, which with the Federal Reserve’s Nov. 1, 2023, pivot “finally joined the risk asset party,” although Mr. Gundlach is awaiting a weaker dollar to support the sector

Fertilizer

Prices Are Sticky Inflation Is Transitory

Trailing Indicators on Food

Are We Listening to the Fed Too Much

Crypto

Recession

November Elections

Years of Inflation and Rate Hike

Confidence Is Not High in the Crypto