Citi High Yield (Treasury Rate-Hedged) Index

Transcription

1 Citi High Yield (Treasury Rate-Hedged) Index The Citi High Yield (Treasury Rate-Hedged) Index is a US Dollar-denominated index that measures the performance of high yield debt issued by corporations domiciled in the US or Canada. The index consists of a long position in high yield bonds and a duration-matched short position in US Treasury bonds. The high yield portion of the index offers exposure to the more liquid, cash-pay bonds, including Rule 144A bonds issued by corporations. To ensure diversification, only two issues per parent issuer are included and each issuer is limited to 2% of the market value of the index. Figure 1 details the design criteria and calculation assumptions for the high yield portion of the index. Figure 1. High Yield portion of the Citi High Yield (Treasury Rate-Hedged) Index Design Criteria and Calculation Assumptions Coupon Currency Minimum Maturity Market Size Number of Issues Issue Dates Minimum Credit Quality Weighting Issuer Cap Reinvestment of Cash Flow Pricing Calculation Frequency Fixed-rate and non-convertible USD At least one year The outstanding amount of an issue must total at least USD1 billion in order to be considered eligible for inclusion. For each issuer, no more than two issues are included. The selection is first based on the largest par amount outstanding and then the most recent issue date. The bonds in the index must be issued within the last 5 years. Furthermore, a bond downgraded from investment-grade can enter the index if it was issued within the last 4 years. Maximum rating: BB+ by S&P and Ba1 by Moody s Minimum rating: C by S&P or C by Moody s Market capitalization prior to applying any capping constraints for diversification Market weight per issuer to be less than or equal to 2% of the market value of the index At daily average of local currency one-month Eurodeposit rate For the high yield portion, primarily third party pricing source unless pricing is not available. In such a case, Citi trader s evaluation is used as supplement prices. For the US Treasuries, Citi trader s evaluation is used. Daily Settlement Date Monthly: Last calendar day Daily: Same day except for last business day of the month, when settlement is last calendar day Base Date March 31, 2008 The duration-matched short position in US Treasury bonds is created to hedge the duration and yield curve exposure of the long position of the high yield bonds in the Citi High Yield (Treasury Rate-Hedged) Index. In an attempt to balance the maturity distribution of the overall index, the short position is constructed using the cheapest to deliver 2-, 5-, and 10-year US Treasury bonds as selected by The Yield Book s Treasury Future Delivery Option Model. In addition, the short position is calculated at the Index Fixing date. See Index Profile under the Methodology for Citi Fixed Income Indices below. Index Methodology 01

2 Each of the high yield bonds in the Index is assigned to one of the 3 reference treasury sectors by comparing the effective duration of the high yield bond to the effective duration of the Treasury bonds. The high yield bond is grouped with the Treasury bond with the closest effective duration match. For each sector, the par amount of the Treasury bond (the short position) is assigned such that the aggregate effective duration of the Treasury bond and the high yield bonds is zero. The following section describes the rules and processes for all Citi s fixed income indices. Index Methodolgy 02

3 Methodology for Citi Fixed Income Indices All Citi Fixed Income Indices follow the general methodology outlined in this section. Index Profile With the growing importance of global indices to portfolio managers and investors throughout the world, it is important to communicate the new index preliminary profile on a timetable that will provide sufficient time for portfolio managers to respond to changes in their benchmarks within their own time zones. The profile fixing enables the dissemination of index information ahead of the month-end date so that investors have time to prepare rebalancing transactions. Index fixing dates provide a clear reference point for index users to know, in advance, of any changes to the composition of the indices. On each index fixing date, publicly available securities information is used to determine index eligibility and indicative values for the following month s index profile. A preliminary profile setting out the anticipated composition of each index is announced via the Citi Fixed Income Indices website one (1) US business day following the index fixing date. Between announcement of the preliminary profile and calendar month-end, Citi continues to track market activities and will remove any issues that are called, tendered, or defaulted. This process enables those tracking Citi s fixed income indices to anticipate changes to index composition, providing sufficient clarity and time to effect any consequent portfolio rebalancing. Index rules stipulate that there must be a minimum of four (4) business days following each index fixing date and before calendar month-end in all of the following business regions: Australia, EMU, Japan, UK, and US. Index fixing dates are subject to change if unforeseen circumstances arise affecting these business days, such as catastrophic natural disasters or regional political conflicts. Issues Eligibility For an issue to be eligible for inclusion in an index, all information on the issue must be publicly available on or before the fixing date, and the first settlement and interest accrual date of the issue must be on or before the end of the month. Whilst Treasury auctions may be announced prior to the fixing date, the results must be final by the fixing date in order to be considered for inclusion. At the same time, bonds that no longer meet the maturity (that is, an average life of less than one year from the last calendar day of the month), amount outstanding, or rating criteria are removed. Any buyback or reverse auction occurring on or before fixing may cause the bond to be removed from the index. After the release of the preliminary profile and prior to the end of the month, Citi continues to track market activity and removes any issues that are called, tendered, or defaulted. Maturity and Issue Size Citi Fixed Income Indices measures the total rate of return of bonds with remaining maturity of at least one year. In addition, each market has a minimum size criterion designed to include only those bonds that are reasonably available for institutional investors under normal market circumstances. Pricing Source Prices for Citi s fixed income indices are generally bid-side prices. Citi Fixed Income Indices relies primarily on Citi traders for bond prices. In selected markets, following local convention, prices from third-parties are used. Index Methodolgy 03

4 Verification Reliable pricing of each security is necessary to ensure reliable index values and returns. Thus, third-party pricing sources and statistical techniques are used to identify pricing anomalies. The prices are provided as indications only. Price challenges are reviewed by the Citi Fixed Income Indices team which may, at its discretion, adjust the price and update the pricing models. Settlement For daily calculations, Citi assumes that indices settle on a same-day basis except on the last business day of the month, when settlement is the last calendar day. Monthly holding periods, therefore, are exactly one calendar month. For example, the January return period would run from the close on December 31 to the close on January 31, regardless of the last business day. However, the last business day in each local market is used for pricing. Index Quality An index quality is assigned to each index bond as of profile fixing. The index quality is first mapped to the Standard & Poor s ( S&P ) rating. If a bond is not rated by S&P but it is rated by Moody s Investors Service, Inc ( Moody s ), Citi assigns the S&P equivalent of the Moody s rating to the index quality. If a bond is splitrated (an investment-grade rating by one rating agency and high-yield by the other), the S&P equivalent of the investment-grade rating is assigned to the index quality. Index quality remains unchanged for the entire performance month. Defaults/Credit Events When an issuer defaults or is assigned a D-rating by S&P, regardless of whether the issuer has filed for bankruptcy protection, its bonds remain in the index until the end of the month. However, the bonds will not be included in the calculation of average profile statistics of the index. The returns are calculated without coupon payment or accrued interest, where applicable. Stability An index should not change criteria often, and all changes should be easily understood and highly predictable. It should not be subject to opinions about which bonds to include on any particular day. However, Citi index composition must change occasionally to ensure that it accurately reflects the structure of the market. Any major changes of the methodology will be notified in advance and published on the Citi Fixed Income Indices website,. In rare occasions, Citi may discontinue an index. Advanced notice will be given and published on the Citi Fixed Income Indices website,. Return Computation Total returns are computed on the assumption that each security is purchased at the beginning of the period and sold at the end of the period. An issue s total rate of return is the percentage change in its total value over the measurement period (see Figure 2). The components of total return are price change, principal payments, coupon payments, accrued interest, and reinvestment income on intra-month cash flows. The total returns use each individual security s beginning-of-period market value. Index Methodolgy 04

5 Figure 2. Total Rate of Return Calculation Methodology Beginning-of-Period Value = (Beginning Price + Beginning Accrued) x Beginning Par Amount Outstanding End-of-Period Value = [(Ending Price + Ending Accrued) x (Beginning Par Amt. Outstanding - Principal Payments)] + Coupon Payments + Principal Payments + Reinvestment Income Total Rate of Return (%) = [(End-of-Period Value/Beginning-of-Period Value)-1] x 100 A note on precision: Returns are computed to at least six decimal places but reported to a maximum of four. In addition, owing to rounding errors inherent in computer floating-point arithmetic, the last digit in any reported value may sometimes be off by one from its true value. Index Methodolgy 05

6 Important Information OTHER DISCLOSURES ADDITIONAL INFORMATION AVAILABLE UPON REQUEST This communication is issued by members of Citigroup Inc. or one of its affiliates (collectively, Citi ) who are not research analysts, and the information in this communication is not intended to constitute research as that term is defined by applicable regulations. Unless otherwise indicated, any reference to a research report or research recommendation is not intended to represent the whole report and is not in itself considered a recommendation or research report. All views, opinions and estimates expressed in this communication (i) may change without notice and (ii) may differ from those views, opinions and estimates held or expressed by Citi or other Citi personnel. This communication is provided for information and discussion purposes only. 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Citi and Citi and Arc Design are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world. The Yield Book is a registered service mark of The Yield Book Inc. and/or is registered in the U.S. and other countries. 2013, Citigroup Index LLC. All rights reserved. Duplication or dissemination prohibited without prior written permission. Citigroup Index LLC 388 Greenwich Street New York, NY The Americas fi.index@citi.com Asia Pacific fi.index@citi.com EMEA fi.index@citi.com Japan fi.index.tk@citi.com Index Methodolgy 06