Current Functionality
The Return Attribution Model runs analysis of a bond's return over specific periods of time,
specifically, breaking down rate of return to component elements. Customers can get a better understanding of the sources of
return for Individual Securities, Trades, Sectors, and Portfolios, including Dynamic Portfolios. The Model calculates a
time-weighted, market-weighted, AIMR (BAI Method) compliant return for transactions in the portfolio.
Total returns are dissected into Treasury Components (returns due to the yield curve; Rolling Yield, Parallel Shift,
and Reshaping) and Spread Advantage (returns in excess of the yield curve; Spread, Spread Change, Convexity Advantage,
Reshaping Advantage, Volatility Change, Current Coupon Spread Change, and Prepayment Difference.) Multi-currency portfolios
are further dissected to isolate the Currency and Currency Hedge effects. Finally by comparing portfolio return components
and sector weightings to a benchmark, the Model measures the Sector Weighting and Issue Selection effects.
The Model strives to analyze the universe of security types in the market and currently handles Governments, Corporates,
Mortgage Pass-Throughs, ABS, CMO, CMBS, and some Derivatives. Security types recently added to the Return Attribution module:
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Interest Rate Futures |
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Mortgage TBAs |
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Swaps (No Optionality)/Swaptions/Caps & Floors |
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Currency Forwards |
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Treasury Inflation-Protected Securities (TIPS) |
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Municipal Securities |
Future Enhancements
Future enhancements to the module address the real and practical needs of the Yield Book customer to output the
analysis in meaningful terms with respect to the way the market operates. Three projects in development are:
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Extension of security types covered |
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Multi-period linking |
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Accounting for intra-day trades |
Security types covered in return attribution will be extended to provide full coverage of all security types, in
particular for derivatives, we will be adding structured notes next.
Multi-period linking is perhaps the most exciting of the return attribution enhancements in the pipeline, as, again,
it reflects a response to the way the market runs, thus promising more meaningful output more easily. Yield Book provides
return attribution analyses in any time period, though with greatest efficiency in monthly increments, and with this
improvement will successfully link individual results -- concurrently taking into account all transactions.
Intra-day trades will soon be accounted for in 'dynamic' portfolio analysis, a feature that is highly desirable in terms of
responding to the way the market actually works. In simplest terms, the enhancement is "essentially a matter of bookkeeping",
according to one Yield Book developer -- nevertheless it requires considerable development effort that includes a database upgrade.
