We need to offer an estimated return of a non-hold-to-maturity strategy. Essentially, we borrow money from the market and buy a bond. Instead of holding the bond to mauturity and locking in a return equal to YTM, we will sell the bond before maturity. How should we provide an estimated return/quote for such strategy?
So far, we are using YTM - borrowing cost, where YTM is known at the time we start the trade, and the borrowing cost, for simplicity, is a fixed annulized rate (for example, if we borrow 100 to purchase the bond, the cost is 5 given a 5% borrowing cost per year. Usually we swap to such fixed rate from 3-month LIBOR using IRS).
My concern is if we use above measure, naturally we will look for bonds with higher YTM (for now, let's assume the borrowing cost is not related to YTM, bond ratings, hence possible lower cost from repo) and filter out bonds with lower YTM. However, since we are not holding the asset to maturity, is it possible that we might filter out some eligbile bonds with low YTM that offer high coupon and whose price won't change much in the future? In short, does YTM - borrowing cost serve as a reasonable estimate of holding-period return/quote for our clients?
(p.s., we tend to avoid rocket science predictive model if it's not siginificantly better than an easy measure like YTM. A ballpark measure that is relatively simple to explain and get is the best)