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Ronnie36
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Fixed Income Pricing - Bid or Mid??!!

September 22nd, 2021, 10:26 am

Hi All, newbie here, was hoping someone could help or advise - I work for a Hedge fund and we are looking to create a fixed income pricing policy for the fund.  This is a fixed income house that trades emerging market (and some G7) bonds

What are your views on pricing Bid vs. Mid and what are the advantages/disadvantages of either approach and what should we consider before deciding to adopt either approach?

Many Thanks in advance for your assistance!

Ronnie
 
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Alan
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Re: Fixed Income Pricing - Bid or Mid??!!

September 22nd, 2021, 7:22 pm

I don't think the issue is a clean one. What if a market is unsettled and there are no bids? Or what if you think the quotes are just far from "fair values"?

Some general principles: SEC stufflawyer stuff

I think you have to adopt and monitor a pretty comprehensive set of rules, including exceptions. How will the rules interact with your redemption policies? How will the rules agree/disagree with third party valuation services? Assume the SEC or your local regulator drops in for an inspection -- how will you prove your valuations? Lots of things to consider. 

If I was an investor, and you adopted, say, Mid-quote pricing for "official values", I think I'd appreciate also seeing a "supplementary valuation" that used the Bids. Ditto for performance measurements.

My two cents.   
 
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Hernan
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Re: Fixed Income Pricing - Bid or Mid??!!

October 1st, 2021, 10:03 am

I agree with Alan, that as an investor I would like to see the bid side.

Working for several years with the Fixed Income EM market, I know that sometimes the market can be bidless. I this case you need to have a defined set of rules so you can explain to your client, your compliance and any external auditor.

Giving that one alternative is to create a yield curve for a particular name and to interpolate the missing bids. If you don't have a minimum of 3 or 4 maturities with bids, what you can do is shift the mid-price. This shift can be based on historical data (something similar to a VaR).

Finally, you could as well use something like Bloomberg's own sources like BGN or BVAL. Keep in mind that they tend to lag on strong movements in the market. They can also enter in case of bidless market combined with your shifted yield curve.

Hope this helps.