Return Attribution of a Portfolio (January to May)
The month of May saw a significant rise in the long rate, or the yield curve has steepened a lot, as
depicted by Figure 1. The results show that the 10 year rate has dropped 30 bpts from January to April.
But the rate rose 50 bpts in the month of May. The 2 year has not changed significantly. Based on a
sample portfolio, the weighted average OAS of the bonds rose in the first three months but then fell
last month, resulting in negligible OAS change over the four months. How do these market factors
impact our bond portfolio performance? If we expect market rates continue to rise, then how should
we manage our portfolio? Using return attributions, we can gain some insight into answering these
The performance of a bond portfolio is affected by many other factors, such as the change in the level
of yield curve, the option adjusted spreads, riding down the curve and many others. In fact, the THC
model uses 11 components to provide traders and portfolio managers to identify the sources of total
returns of the portfolio. Using return attribution to identify the key sources of returns, we do find
something that gives us some insights: in recent month, with the Fed’s impact on the shape of the
yield curve, there are several major contributors to the total return of a bond portfolio.
We consider a fixed income portfolio that has bullet and structured agency bonds, corporate bonds,
municipals, and MBS. A summary description of the portfolio is given below in Table 1.