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Question about Weighted Av. Mat vs. Duration in a Municipal Bond Fund
Old 05-30-2013, 03:22 PM   #1
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Question about Weighted Av. Mat vs. Duration in a Municipal Bond Fund

Hi- I looked over my friend's portfolio and I am puzzled by the difference direction in weighted average maturity of this fund, and its duration. It's a managed municipal bond fund, FHIGX-Fidelity Municipal Income Fund. The Fidelity website lists its weighted average maturity as 6.10 years, and its duration as 7.2 years, both figures as of 3/31/2013.

What gives? With straight taxable bonds, in my limited experience a zero will have a duration equal to its time to maturity, and bonds paying interest will be shorter duration than this, relative to maturity date.

I have little experience with municipals, or mutual funds so I don't know what I don't know here.

Can someone explain what seems to me to be a paradox?

Ha
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Old 05-30-2013, 03:39 PM   #2
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bond duration is defined as the change in price of a bond for a 100 basis point change in yield (which depends on an interest rate) - i'm always puzzled why everyone associates "years" with bond duration

weighted average time to maturity is just that
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Old 05-30-2013, 03:51 PM   #3
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bond duration is defined as the change in price of a bond for a 100 basis point change in yield (which depends on an interest rate) - i'm always puzzled why everyone associates "years" with bond duration

weighted average time to maturity is just that
Probably the reason that people associate duration with time to maturity, is that it is related. Not the same thing, but related.

For example, which is going to have the greater duration of two bonds with identical face value and coupon and yield o maturity- the one with 5 years to go or the one with 10 years to go?

Bond duration - Wikipedia, the free encyclopedia
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Old 05-30-2013, 03:55 PM   #4
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The one that is more sensitive to price - the one with 10 years to go.

Time to maturity doesn't depend on the interest rate used to value the bond, duration does. For example when interest rates drop, bond duration increases.
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Old 05-30-2013, 03:57 PM   #5
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Ha, does the fund have derivatives exposure or borrowed money to juice returns? Either could conceivably lengthen effective duration.
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Old 05-30-2013, 04:23 PM   #6
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Ha, does the fund have derivatives exposure or borrowed money to juice returns? Either could conceivably lengthen effective duration.
Thanks Brewer for the suggestion. I'll check this. I'll have to look through the prospectus, as this information is not right out front in the summary information.

Ha
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Old 05-30-2013, 04:29 PM   #7
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Thanks Brewer for the suggestion. I'll check this. I'll have to look through the prospectus, as this information is not right out front in the summary information.

Ha
Hmm, now that I look at the fund, I do not see either borrowed money or derivatives. Perhaps they have a bunch of zeroes? The muni world is laden with exotic structures and some of them have extended duration, optionality, etc. which could also be making the numbers funky.
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Old 05-31-2013, 12:14 PM   #8
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Hmm, now that I look at the fund, I do not see either borrowed money or derivatives. Perhaps they have a bunch of zeroes? The muni world is laden with exotic structures and some of them have extended duration, optionality, etc. which could also be making the numbers funky.
When you mentioned optionality I talked to a Fidelity rep, who did not understand, but told me that he would talk with their fixed income department.

He said that after some time, one of these guys told him that the odd numbers come from call provisions on many munis, which affect duration differentially from average maturity. I had noticed some other oddities, one being that their calculated average maturity did not jibe with the weighted % of bonds in each class, when classified by final maturity date.

More negative convexity to make our days fun.



Ha
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Old 05-31-2013, 12:26 PM   #9
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When you mentioned optionality I talked to a Fidelity rep, who did not understand, but told me that he would talk with their fixed income department.

He said that after some time, one of these guys told him that the odd numbers come from call provisions on many munis, which affect duration differentially from average maturity. I had noticed some other oddities, one being that their calculated average maturity did not jibe with the weighted % of bonds in each class, when classified by final maturity date.

More negative convexity to make our days fun.



Ha
Aren't embedded derivatives in fixed income fun? That is one of the reasons I like junk (at the right price): you may have to do credit work, but at least you generally don't have to have access to a Bloomberg terminal to understand how you can get killed by market rates whipsawing.

I am wondering if it is too late to short a mortgage reit or just a mortgage bond ETF.
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Old 05-31-2013, 12:37 PM   #10
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I am wondering if it is too late to short a mortgage reit or just a mortgage bond ETF.
This is one of those fields where there is so much that I don't know, and haven't even become aware of the important things that I don't know.

Ha
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Old 05-31-2013, 12:39 PM   #11
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This is one of those fields where there is so much that I don't know, and haven't even become aware of the important things that I don't know.

Ha
Mortgage reits are easy: take a pinch of equity, leverage it 8 to 10 times with repos, and buy a huge pile of (mostly) agency MBS. Pay out everything you earn via this strategy as dividends. Implode when rates rise.
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Old 05-31-2013, 01:08 PM   #12
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I see, the old standby borrow short lend long. Jut an old fashioned S&L, only worse because of funding issues.

Interest rates do seem to be moving upward, but it could be that Il Maestro 2nd is just doing a head- fake to keep the hawkish board members off his back. I cannot imagine his Q-E infinity being abandoned, except under very heavy inflation duress.

I do not understand the linkage to a certain unemployment number. Unemployment may be falling, but total number or % of population in work ages is also falling. Unless everyone is suddenly heading for ER, this sounds negative to me.

So, I'd be afraid of this trade. Which does not mean that it might not be a money maker!

Ha
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Old 05-31-2013, 01:33 PM   #13
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I see, the old standby borrow short lend long. Jut an old fashioned S&L, only worse because of funding issues.

Interest rates do seem to be moving upward, but it could be that Il Maestro 2nd is just doing a head- fake to keep the hawkish board members off his back. I cannot imagine his Q-E infinity being abandoned, except under very heavy inflation duress.

I do not understand the linkage to a certain unemployment number. Unemployment may be falling, but total number or % of population in work ages is also falling. Unless everyone is suddenly heading for ER, this sounds negative to me.

So, I'd be afraid of this trade. Which does not mean that it might not be a money maker!

Ha

Agree with all above. I am not temperamentally suited to outright shorting and the puts on these things look expensive, so I will likely remain on the sidelines.
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Old 05-31-2013, 04:21 PM   #14
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Aren't embedded derivatives in fixed income fun? That is one of the reasons I like junk (at the right price): you may have to do credit work, but at least you generally don't have to have access to a Bloomberg terminal to understand how you can get killed by market rates whipsawing.

I am wondering if it is too late to short a mortgage reit or just a mortgage bond ETF.
What do you of just regular GNMA funds? I sold almost of all of both mine and Mom's much large position today. In my mom's case she's had a large position in a Vanguard GNMA for 30+ years, and its provided a lot of income over the years and I'm feeling a bit of sellers regret.
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Old 05-31-2013, 11:11 PM   #15
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Fixed income securities with optionality/negative convexity scare the crap out of me in today's market. I think selling was a good decision. I take the other side of the trade with a 30 year fixed mortgage.
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