Basic interest rate anticipation strategy involves moving between long-term
government bonds and very short-term treasury bills, based on a forecast of
interest rates over a certain time horizon.
Since long-term bonds change the most in value for a given change in
interest rates, a manager whould want to hold long-term bonds when rates are
falling. This would provide the maximum increase in price for a portfolio. The
reverse is true in a rising interest rate environment. Long-term bonds fall the
most in price for a given rise in interest rates and a manager would want to
hold treasury bills. Treasury bills have a very short term and do not change
very much in value.
A more sophisticated interest rate anticipation strategy might involve
the use of "zero coupon" or "strip"
bonds which are far more sensitive to interest rate changes than normal
bonds. Zero coupon bonds have no coupon payments and move in price as their
term changes or interest rates change. Their high price volatility makes them
especially suitable for speculating on interest rate movements. As the saying
goes: "when you are right you are very very right and when you are bad you
are horrible".
Interest rate derivative securities, such as options and futures, can be
used to implement an interest rate anticipation strategy at a lower transactions
cost. Market traded or "over-the-counter" (OTC) securities can be
used instead of actual bonds to place "bets" on the future course of
interest rates. |
