when sombody say month end extension

[ud5555]

end meaning us 2.2year what doet it mean?

 

[red army]

end meaning us 2.2year what doet it mean?

not sure, always wanted to know - ask your analyst..

 

[jagat]

Most Fixed Income Indices are defined by a strict set of rules that determines which securities are included and which securities are excluded. Since fixed income instruments are dynamic in nature, ie they have a set maturity and coupon rate, rebalancingof the index needs to be done periodically as new instruments are introduced and old ones mature. Historically this has been done on the last day of each month. To simplify security selection for index creation, securities are usually categorized by type of issuer (ex Government debt, Corporate debt etc) and also issue size. A particular index then defines which security type is included and also minimum issue size. Ex: Government index with minimum size of greater than 500m USD equivalent. Since short term Treasury bills would be included in such an index and in some cases could represent a large weight of the index, Fixed income indexes tend to have a rule that excludes all securities under 1 year maturity and not waiting until bonds mature before they fall out of the index. At the end of each month, the index is therefore rebalanced whereby all the new securities that were issued by the particular issue type is now included, and all bonds with less than 1 year maturity drop out. If borrowers issued continuously during the year, and assuming debt maturity was consistent across all maturity you would find that duration of an index ex (5 years) would be set at the end of a particular month, drift down intermonth as time passes (now 4.9 one day before index extension), the index would then be reset at the same level at the end of the month (again 5 years). The problem is that issuers are sporadic in their issuance and also their maturity buckets. Indexes extension therefore vary greatly inter-month depending on borrowers needs. The exception is the US government which, for example issues new 10s every 3 months. As these new issues are added at the end of the month this results in greater index extension every three months. The index resets on the official closing time of the last day of the month so games can be played as everyone knows how much the index needs to extend at a particular time. Money managers have the choice to either buy before the index extension, a few hours or a few days, buy at the index extension, or buy a few days after. This is assuming they have not bought any of the new issues intermonth.

 

[Martinghoul]

Any given bond index is, effectively, a bond portfolio. As such it has a duration that changes during the course of the month, as mentioned by jagat. When someone says 'index extends by 2.2 yrs' they mean that the duration of the index portfolio has decreased by 2.2yrs, so bonds need to be bought to compensate.

 

[arabianights]

biggggggg ones coming this month I hear!

 

[caneuben]

Is there a rule of thumb on how to classify whether the Month End Duration Extension Index is consider a small, medium or large extension?

 

[Martinghoul]

Compare it to the historical average.

 

[caneuben]

Compare it to the historical average.

Hi Martinghoul,

Thanks for your reply. Could you please advise where can i find the historical average, as per your suggestion? I have search extensive through the web, but not find any source that offer this information. Your assistance will be much appreciated. Thank you.

Regards
Caneuben