View
25
Download
0
Category
Preview:
DESCRIPTION
D UTCH C OMMISSION ON B ONDS A Standing Committee of Dutch Society of Financial Analysts, VBA. High Yield Bond Indices Introduction Objectives Features of High Yield Market Benchmark Selection Criteria HY Benchmark Analyzed Constrained Indices Final Remarks. - PowerPoint PPT Presentation
Citation preview
DUTCH COMMISSION ON BONDSA Standing Committee of Dutch Society of Financial Analysts, VBA
London
October 16th, 2003
Vereniging van Beleggingsanalisten
High Yield Bond Indices
• Introduction
• Objectives
• Features of High Yield Market
• Benchmark Selection Criteria
• HY Benchmark Analyzed
• Constrained Indices
• Final Remarks
bdC
“ You cannot please everyone, but constructing a High Yield
Bond Index, seems to please nobody … ”
bdC INTRODUCTION October 2003
• Foundation of EMU
• Expansion of credit horizon
(beyond Investment Grade)
• Moderate inflation and interest rate
environment
bdC INTRODUCTION October 2003
INTRODUCTION October 2003
bdC
Nominal volume US en Euro High Yield
0
100
200
300
400
500
600
ok
t-8
9
ok
t-9
0
ok
t-9
1
ok
t-9
2
ok
t-9
3
ok
t-9
4
ok
t-9
5
ok
t-9
6
ok
t-9
7
ok
t-9
8
ok
t-9
9
ok
t-0
0
ok
t-0
1
ok
t-0
2
bil
lio
n U
SD
US High Yield Euro High Yield
Source: Merrill Lynch USD and Euro High Yield Indices
OBJECTIVES October 2003
• To provide a fair, non-judgmental
and
transparant comparison of HY Bond
Benchmark
Indices
• Not to judge the attractiveness of
the HY market
• Not to give outspoken
recommendations
bdC
FEATURES OF HIGH YIELD MARKET October 2003
• Low correlation with other asset
classes
• Both original HY issues & “fallen
angels”
• Public, non-convertible bonds,
issued by
corporates not being in default
bdC
LOW CORRELATION October 2003
bdC
1.0000.9600.25210-Year Treasuries
Selected Asset CategoriesJune 1992 – June 2002
1.0000.9950.0470.5150.2470.1230.052(0.005)0.131Russell 1000
0.687
Russell1000
0.644
1.000
S&P500
0.022
0.141
(0.053)
0.093
0.251
0.274
0.284
1.000
3-MonthTreasuries
3-MonthTreasuries
1.0000.1930.4740.1330.030(0.051)(0.110)Russell 2000
0.0460.5050.2590.1330.0650.013S&P 500
1.0000.8520.867Mortgage Backed
Russell2000
1.000
LeveragedLoans
0.391
1.000
HYBonds
0.004
0.467
1.000
HGCorporates
(0.086)
0.310
0.870
MortgageBacked
(0.133)(0.133)Leveraged Loans
0.1740.127High Yield Bonds
0.9030.869High GradeCorporates
1.0005-Year Treasuries
10-YearTreasuries
5-YearTreasuries
Source: PIMCO, Merrill Lynch & Co., Loan Pricing Corporation, Standard & Poor’s, Russell Indices
BENCHMARK SELECTION CRITERIA October 2003
Quality of the index• Transparency
• Availability
• Consistency
• Flexibility
Practical usefulness of the index• Replicability & Investibility
• Representativeness
• Relevancy
• Acceptance
bdC
Index Providers• CSFB
• JP Morgan
• Lehman Brothers
• Merrill Lynch
• Citigroup
bdC HY BENCHMARKS ANALYZED October 2003
bdCFlagship highyield indices
Sub indices Family members
CSFB CSFB HighYield (1986)
Available by rating, sector, region, etc. Developed countries only index, Western European HYIndex (subindex non-US$ denominated bonds
USD GlobalHigh Yield Index(1994)
USD Domestic, USD developed and USDEuropean High Yield Index. Subdivisionavailable by rating and sector
JP Morgan(formerChaseIndices)
Euro High YieldIndex (1999)
Subdivision available by rating and sector European Currency High Yield Index (Euro and Sterling),Sterling High Yield Index, European aggregate High YieldIndex
US High Yieldindex (1986)
Subdivision available by rating andmaturity type
Global High Yield index (US, pan European, Emergingmarkets and HY CMBS)
LehmanBrothers
Pan EuropeanHigh Yield index(1999)
Euro High Yield index and Non EuroHigh Yield index (GBP currently)Subdivision not available yet due tolimited number of issues
Euro High Yield index and Non Euro High Yield index(GBP currently), Global High Yield index (US, panEuropean, Emerging markets and HY CMBS)
US High YieldMaster II Index(1986)
Cash Pay Only Index (first high yieldindex) and Deferred Interest Bonds IndexSubdivision available by rating
Global High Yield index (US, Europe and Canada)Specific:High Yield 175 index
Merrill Lynch
Euro High YieldIndex (1997)
Subdivision available by rating Global High Yield index (US, Europe and Canada),European currency High Yield Index (Euro and Sterling),Sterling High Yield Index
Citigroup(formerSalomon SB)
US High-YieldMarket Index(1989)
High Yield Cash-Pay index, Deferred-Interest indexSubdivision available by rating andmaturity sector
Family:Bankrupt/ default index, Safest of High Yield
HY BENCHMARKS ANALYZED October 2003
HY BENCHMARKS ANALYZED October 2003
Criteria• Eligible Currency
• Maturity
• Domicile and Market Type
• Coupon Type and Structure
• Rating
• Size
• Construction Methodology and Pricing
• Data Sources and Availability
• Returns and Composition
bdC
CONSTRAINED INDICES October 2003
bdCConstrained indices Additional rules
CSFB CSFB High yieldIndex (1986)
if issuer has more then 2 issues outstanding then the two most liquidare selected for inclusion
USD Global HighYield Index (1994)
if issuer has more then 2 issues outstanding then the two largest areselected for inclusion, if difference is size is less or equal to 20 %other criteria such as security type or seniority will be used
JP Morgan(formerChaseIndices)
EUR High YieldIndex (1999)
Currently the index is not constrained but the above constrained willbe implemented if they index reaches 100 issues, currently not thecase
US High Yield MasterII Constrained Index(2002)
Max 2 % per issuer, Iterative algorithm is used by which issuers inexcess of 2 % are reduced to 2 %, with pro rata increase of the otherissuers
MerrillLynch
Euro High YieldConstrained Index(2002)
Max 3 % per issuer, Iterative algorithm is used by which issuers inexcess of 3 % are reduced to 3 %, with pro rata increase of the otherissuers
Citigroup(formerSalomon SB)
US High-Yield MarketIndex Capped Index(2002)
Issuer weight capped at 5 bn nominal USD per issuer, proportionalreduction of included issues until the 5 bn limit is satisfied
Seasoning period of one full calendar month for fallen angels beforethey enter the index
FINAL REMARKS October 2003
Constrained Indices• Control maximum weights
• Seasoning
Conclusions• No outspoken recommendations due to diversity
• Booklet meant to be a useful tool for structuring
the benchmark
selection process and sorting out the
implications of a certain
choice
• Dialogue needs to be continued in order to
improve the quality of
benchmarks
bdC
Telephone/e-mail
Rolf-Pieter ter Horst + 31 20 563 8048 rolf-pieter.ter.horst@ingbank.comChairman
Jurgen Aarts + 31 30 257 6183 jurgen.aarts@fortis.comVice Chairman
Irene Ruis + 31 30 232 9212 iruis@spfbeheer.nlSecretary
Koos ‘t Hart + 31 20 583 4484 j.thart@sfbgroep.nlAdvisor
Internet
Dutch Society of Financial Analysts (VBA) & www.nvba.nlDutch Commission on Bonds (DCB)
INFORMATION October 2003
bdC
Recommended