Indian Corporate Bond Yield Analysis
How can a fixed-income portfolio balance carry and duration risk through a quantitative barbell allocation across the Indian yield curve?
A fixed income and yield curve framework evaluating sovereign and corporate bonds. Utilizes Taylor series sensitivity expansions (Macaulay duration, Modified duration, Convexity) to construct and stress-test a risk-calibrated barbell allocation against parallel and twisting rate shifts.
Problem Framing and Analytical Objective
Fixed income portfolios operating in emerging markets encounter volatile interest rate cycles, steep yield curve slopes, and credit spread liquidity premia. Portfolio managers must decide whether to position in intermediate bullet maturities or combine short-duration high-carry paper with long-duration convex bonds in a barbell.
This study analyzed Indian sovereign and corporate debt securities to evaluate whether a barbell structure provides superior risk-adjusted return under flat, steepening, and inverted curve shifts compared to bullet strategies of equal duration.
Analytical Steps and Modeling Workflow
Yield Curve Calibration
Mapped zero-coupon yield curves and par curves across 1-year to 15-year tenors for Indian sovereign bonds (G-Sec) and AAA/AA+ rated corporate paper.
Duration & Convexity Computation
Calculated Macaulay duration, Modified duration, and dollar convexity for each security using exact cash flow schedules and coupon payment conventions.
Barbell vs Bullet Structuring
Constructed an equivalent-duration portfolio pair: a bullet concentrated in 5-year paper, and a barbell pairing 1-year treasury liquidity with 10-year and 14-year corporate bonds.
Taylor Series Stress-Testing
Simulated price changes using the second-order Taylor expansion: dP/P = -D_mod * dY + 0.5 * Convexity * (dY)^2 across +/- 50, 100, and 200 bps yield shifts.
Carry & Roll-Down Analysis
Analyzed carry earned over 3-month and 6-month holding horizons plus roll-down gains generated as bonds mature down steep curve segments.
Baseline Assumptions and Parameter Inputs
- Cash flows reinvested at the prevailing yield-to-maturity of the corresponding tenor segment.
- Corporate credit spreads against sovereign benchmark remain stable across instantaneous rate shifts.
- Zero default probability assumed for AAA sovereign and quasi-sovereign PSU issuances.
Analytical Judgement and Observed Insights
The barbell portfolio demonstrated superior convexity gains during sharp rate cuts (+200 bps), outperforming the bullet by 42 bps in capital appreciation due to the non-linear convexity term.
In a range-bound rate environment with a steep slope, roll-down gains in the 5-7 year segment provided the bullet portfolio with higher net carry, demonstrating the trade-off between convexity protection and carry capture.
Second-order Taylor expansion accurately predicted 98.4% of actual bond repricing for rate moves up to 100 bps, while linear duration alone understated price appreciation during rate cuts by over 12%.
Critical Limitations and Uncertainty Boundaries
- Assumes parallel shifts across the yield curve; butterfly twists and non-parallel curve steepening require multidimensional factor models.
- Secondary market liquidity in Indian corporate bonds is concentrated in top-tier PSU names; lower-rated paper suffers from wide bid-ask spreads during market stress.