Managing interest rate and spread through overlay
- 29 July 2024 (7 min read)
KEY POINTS
Institutional clients, such as pension funds and insurers, have a vested interest in managing interest rate and credit spread risks due to their potential impact on their financial assets and liabilities, and overall profitability. Managing credit spread risk is crucial for maintaining the stability and creditworthiness of their balance sheets as well as ensuring their solvency and financial health.
The "Key Rate Duration" approach by AXA-IM allows for a more precise assessment of interest rate and credit spread risks by measuring the sensitivity of a fixed income portfolio's value to changes in specific interest rates or credit spreads at given key maturity points along the yield curve.
This approach offers precision and reduction of basis risk, making it crucial in volatile interest rate environments particularly when the yield curve experiences non-parallel shifts such as steepening and/or flattening. Additionally, AXA-IM applies the "Wedge" approach, which offers a more realistic representation of interest rate movements. The possibility to customize scenarios, providing sophisticated modelling capabilities, allows to design fully tailored hedging strategies.
AXA-IM opts for CDS indices to mitigate credit risk exposure as they are the most liquid instruments on the credit market. The methodology involves analyzing differences in composition and sensitivity between the CDS indices and the fixed income portfolio.
Derivatives Overlay
Overlay strategies are investment techniques used to manage specific risks or enhance the performance or risk return profile of an existing investment portfolio.
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Disclaimer
This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient.
This material does not contain sufficient information to support an investment decision. Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate London EC2N 4BQ