Imagine you are the fixed income portfolio manager for a large pension fund. The portfolio primarily consists of investment-grade corporate bonds, U.S. Treasuries, and municipal bonds. Recently, there has been an increase in interest rate volatility and liquidity considerations have become more pronounced in your investment strategy.
Your task is to evaluate the liquidity profile of your current bond holdings and propose a strategy to enhance liquidity to better manage the risks associated with potential market fluctuations. In your response, discuss the factors affecting liquidity in your portfolio, identify the characteristics of the bonds that may impact their liquidity, and suggest specific actions to improve liquidity management. Additionally, consider how your liquidity management strategy aligns with the fund’s overall investment objectives, particularly in terms of risk tolerance and return expectations.