Deutsche Bank 's Fixed Income Research Group Essay examples

Deutsche Bank 's Fixed Income Research Group Essay examples

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Deutsche Bank’s Fixed Income Research Group was an internal R&D department for fixed income instruments. One of the group’s primary activities was relative-value. Relative-value groups look for yield curve trades to pitch to clients as well as for their proprietary trading desk. Their mandate was to search for untapped value across bond markets and interest rate derivatives. For the group, one way to find relative-value trades was to compare the prices of traded securities against the prices that the group thought the securities should trade at. The group developed their own proprietary yield-curve model, which was based on three factors: inflation, output gaps, and short rates. After estimating the variables of the three-factor model, the team calibrated the model to price zero-coupon bonds with different maturities. They then updated and calibrated the model by using the latest numbers on various U.S. Treasury bonds. The idea behind this was to then compare the actual zero-coupon yield curve against the predicted ones coming out of their model and see if any trade ideas presented themselves. After running the model, several trades seemed to appear and the team was left to decide on which trades offered the highest profit potential.
For the case, our group’s task was to find the spot rates for all of the maturities of the various U.S. Treasury bonds on August 15, 2003, and compare these with the output from Deutsche Bank’s Zero-Coupon Yield Model to make recommendations on whether to buy or sell the bonds. To find the spot rates at each maturity, we estimated the rates by using bootstrapping. We first entered in the coupon rate, maturity date, and current price for each U.S. Treasury Bonds, on an Excel file. Then on another file,...

... middle of paper ...

..., the differences between our spot rate and the spot rate in the study are almost negligible(what about 15-20?), and in maturities 20y and 25y, the Deutsche Bank spot rates were slightly higher than the spot rates we found for these two years. These results could lead investors to believe that the Deutsche Bank model can produce greater returns in the long term (>10 years) while bootstrapping can produce greater returns in the short term (<10 years.)
An explanation for the difference between our returns and the returns from the model is that Deutsche Bank developed their own zero coupon yield model, while our group used bootstrapping to arrive at our spot rates. The difference in the formulas used explains the difference between our results.
The chart below puts our bootstrapped spot rates and the spot rates derived from the Deutsche Bank Model side by side.

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