By: Russ Kamp, CEO, Ryan ALM, Inc.
Happy to share with you a recent research piece by Ron Ryan discussing the problem with YTM as a return calculator. His 50+ years as an industry-leading fixed income researcher/portfolio manager provide him with a unique understanding of misleading yield calculations.
As Ron points out, Yield to Maturity (YTM) assumes you will reinvest every six months at the purchase YTM until maturity of the bond. How could this happen? Yields are changing every day, if not continuously. Furthermore, will you reinvest exactly every six months into the same maturity and same YTM? Sounds like Mission Impossible! In fact, the reinvestment rate on any bond is based on the total return of what you reinvested into. How many folks truly appreciate that fact?
As always, you can find this research note along with years of additional research insights at RyanALM.com. We hope that you find our insights meaningful.
Ryan ALM Blog 
Hi Russ:
Back from Maine—hope you’ve had a great Summer.
Read through Ron’s piece—very good.
One question, toward the end, he indicates that ‘the Ryan ALM cash flow matching model is well tested showing a funding cost savings of about 2% per year or more…’
What is the highest cost savings you/Ron have ever achieved? I’d be interested to hear (and put an over/under at 5%).
Hope we can get together over the next week or two…Jack
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Hey Jack – Good to hear from you. The cost savings is a function of the length of the program and the rate environment. The longer the maturity and the higher the yields, the greater the savings. I don’t know what Ron was able to achieve in the 80’s when rates were substantially higher, but we are reducing the cost of FV benefits >50% on 30-year programs.