Bonds

Bonds get a reputation for being boring. They are not. Unlike equities, where the value is the residual claim on a business, a bond is a contract — coupons promised on stated dates, principal returned at maturity, terms written down. That contractual nature is what makes the asset class so powerful, and so consistently misunderstood. A bond's price doesn't move because someone is excited about earnings; it moves because rates moved, or inflation expectations shifted, or credit perception changed. The drivers are macro, structural, and observable.

At PMC, we don't buy bonds to collect yield and wait. We buy bonds when the price is set up to appreciate — and that means understanding the machinery underneath.

Bond fundamentals

Four ideas anchor everything that follows: the coupon, the yield to maturity, the price-versus-par relationship, and the universe of issuers you can buy from. None of the four is complicated, but each one gets used wrong by people who skip the basics.

The relationship between coupon, YTM, and price is the first thing to internalise. Coupons are fixed; YTM floats with the market; price is whatever number reconciles the two. That mechanic is the whole game.

The two strategies of bond investing

There are exactly two ways to make money owning a bond, and they call for different filters when picking what to buy.

The second strategy is what PMC pursues. It demands more work — you are running a macro view as much as a credit view — but it offers something the buy-and-hold strategy cannot: capital gains alongside coupon income.

The price-yield relationship

Everything in fixed income flows from one fact: bond prices and bond yields move in opposite directions.

The mechanic is unarguable. A bond's price is the present value of its future cash flows — coupons across the life of the bond, plus the face value at maturity. The discount rate applied to those cash flows is the prevailing yield. If yields rise, the discount rate rises, and future cash flows are worth less today — price falls. If yields fall, the discount rate falls, future cash flows are worth more today — price rises. There is no scenario where this breaks.

Because we are looking for gains from price appreciation, our job is to find the conditions that push yields down. There are four classic catalysts.

When two or more of these line up at once — say, peak rates plus softening growth plus falling inflation expectations plus a coming policy pivot — the setup for a bond rally is on. The skill is recognising those windows early.

Duration

Interest rates are one of the main drivers of bond performance, and duration is how we measure the sensitivity. Duration is the weighted-average time it takes to receive a bond's cash flows — but it doubles as a price-sensitivity rule of thumb. Modified duration translates the time-weighted figure into a percentage price impact for each 1% move in yield.

The interpretation is direct: a bond with a modified duration of 5 will fall roughly 5% in price for every 1% rise in yields, and rise roughly 5% for every 1% fall. A bond with modified duration of 12 moves 12%. Duration is leverage on a macro view.

Three structural factors push duration up or down.

Putting the three together gives you the rule of thumb every PMC member should be able to apply at the whiteboard: for the price-appreciation strategy in a falling-rate environment, you want bonds with the longest maturity, the lowest coupon, and the lowest yield. All three factors stack toward higher duration and higher capital gains as rates fall.

A practical example

Try this without touching a calculator.

You have three options:

Convexity

Duration is a useful first-order tool, but it is too simplistic on its own. Convexity is the second derivative of the price-yield relationship — it captures the curvature that duration's straight-line approximation misses.

The picture to hold in your head: duration draws a straight line from today's price-yield point. Convexity is the curve that the actual price-yield relationship follows. For most bonds, that curve bows upward — meaning the bond gains more in price when yields fall by 1% than it loses when yields rise by 1%. Positive convexity is a desirable property; it asymmetrically rewards holders.

For most PMC pitches, the practical takeaway is simpler: when comparing two bonds with similar duration, the one with higher convexity is the better instrument for the price-appreciation strategy, because it captures more of the upside if rates fall further than expected.

The yield curve

A yield curve plots the yields of bonds from a single issuer (most often the U.S. Treasury) across different maturities. Reading it well is one of the more practiced skills in fixed income, because the shape of the curve carries information about where the market thinks rates and growth are heading.

Three shapes show up in practice, and each one tells you something different.

The curve also reflects pure interest-rate expectations: if the market expects the central bank to cut, the long end falls relative to the short end and the curve flattens or inverts. If the market expects hikes, the long end rises relative to the short end and the curve steepens.

A snapshot of the U.S. Treasury yield curve as of the time of this session looked roughly like this:

U.S. Treasury yield curve, October 2025. Mildly inverted at the front end (the 2–3y belly sits below the 6m), then steepens through the long end — a curve in transition from inversion back to normalisation.

Corporate yield curves carry an additional signal: a corporate yield curve is a window into the market's view on the issuer's financial health. An inverted corporate curve — where short bonds yield more than long ones — usually means investors are worried about credit risk or near-term liquidity issues. The market is pricing the risk of trouble in the next 12–24 months as higher than the risk further out.

Currency risk

Bonds priced in a foreign currency carry an extra return engine, for better or worse. When you buy a Mexican peso-denominated MBONO from a USD base, your total return is the bond's local-currency return combined with the move in MXN/USD over your holding period. Currency can enhance returns dramatically, or wipe them out.

What appreciates a currency

Eight catalysts drive currency appreciation, and most of them rhyme with the catalysts that push bond yields down — which is partly why fixed-income and FX investing live in the same intellectual neighbourhood.

• Strong economic growth that pulls in foreign direct investment (FDI)
• Trade surplus or a narrowing trade deficit, which raises demand for the local currency
• Higher interest rates relative to other major economies — yield-seeking capital flows in
• Low inflation — preserves the currency's purchasing power
• Fiscal and budgetary discipline — lowers sovereign default risk
• Political stability — reduces the risk premium foreign investors demand
• Tighter monetary policy — reduces money supply and supports the currency

When several of these align, the currency tends to grind higher — and any bond denominated in it gets a tailwind on top of its local-currency return.

A brainteaser worth doing in your head

USD 2025 — when the wind changes

This year illustrated how meaningful currency can be. The dollar weakened across the board against the major reserve currencies, driven by political and trade uncertainty, lower U.S. yields relative to expectations, and improved European policy positioning.

For PMC's portfolio, holding non-USD bonds and equities through this period meant the FX leg contributed positively to total return — the same pattern that has repeated across multiple PMC FX exposures this year.

Default risk and credit ratings

The other side of bond risk is the issuer not paying you. Credit risk is independently rated by three agencies — Fitch, S&P, and Moody's — using letter scales that compress a complex underwriting analysis into a single grade. The Fitch / S&P scale runs from AAA at the top to D for default; Moody's uses a slightly different notation (Aaa to C). The cut-off between BBB- (Baa3 on Moody's) and BB+ (Ba1) is the most important line on the scale: above it is investment grade, below it is high yield.

The Fitch scale, with representative issuers at each rung:

Fitch credit rating ranks. The horizontal break between BBB and BB separates investment grade from high yield — a line that materially changes the cost of capital and the universe of investors that can hold the paper.

The cliff at the BBB–BB boundary is structural. Many institutional mandates — pension funds, insurance companies, regulated investment vehicles — can only hold investment-grade paper. A downgrade across that line forces price-insensitive selling, which is why BBB-rated issuers will fight hard, and pay financially, to protect their rating.

How credit ratings are made

A credit rating is not a black box. It is the output of three categories of analysis, each weighted depending on the issuer type.

When a PMC pitch involves credit, every one of these buckets should be addressed in the deck. Skipping any of them flags to a senior reviewer that the analysis is incomplete.

Fiscal policy and bond performance

For sovereign bonds especially, fiscal policy is one of the most important variables most analysts under-weight. Government decisions about spending, taxation, and debt issuance shape the supply-demand mechanics of the bond market directly, and the credit perception of the issuer indirectly.

Six effects to keep in mind, all of them visible in real markets right now.

The cleanest mental model is to track fiscal policy through two channels at once: the supply channel (how much paper is the government issuing?) and the credit channel (is the trajectory of the deficit improving or deteriorating?). Both feed yields, in different directions.

The PMC Credit Scoring Model

The Quant team has built a standardised credit-scoring tool to support credit analysis across PMC pitches. It lives in the shared workspace at PMC Intellectual Capital → PMC Models → Credit Scoring Model, and any team using credit in a pitch should pull it through the model rather than building bespoke ratios from scratch.

What the model does

Integrating it into a pitch

The integration flow is five steps, and each one is meant to be quick.

1. Select peers and bonds. Define the comparison set — same sector, similar size, similar duration profile.
2. Calibrate the scoring model. Set the weighting and calibration ranges for the specific use case.
3. Run market and fundamental data through the Bloomberg API. The model pulls automatically.
4. Analyse scores and drivers. Read the breakdown charts; identify what is driving the issuer above or below peers.
5. Include the insights in your pitch. The visual outputs are pitch-ready.

A worked example: UnitedHealth (UNH)

Run on UnitedHealth Group against its health-insurance peer set (CVS Health, Cigna, Elevance Health, Humana, Centene), the model surfaces a clear and actionable contrast.

On leverage scores, UNH lands well above the peer median — close to the maximum of the 0–100 calibration range — signalling exceptional balance-sheet strength. The leverage layer is built from several leverage ratios (Debt-to-Equity, Total Debt / EBITDA, and similar) and calibrated against the peer set. The takeaway: from a balance-sheet perspective, UNH looks structurally stronger than every peer except Elevance and Humana, and far stronger than CVS or Cigna.

On liquidity scores, the picture flips. Liquidity is pulled directly from Bloomberg's LQA Liquidity Score and reflects how easily a position can be entered or exited at fair price. UNH lands well below the peer mean — meaning the bonds are less liquid than competitors, which has practical implications for trading flexibility and position sizing. A pitch on UNH paper would need to address that constraint head-on: the credit story is excellent, but the instrument-level liquidity is a real consideration for the portfolio.

The point of running the model is that you would not have arrived at that nuanced "great credit, weak liquidity" framing by looking at any single ratio. The aggregate score plus the layer-by-layer breakdown is what makes it useful in a pitch.