Initial portfolio construction starts with understanding tax/regulatory-related information provided by the investor, including federal tax status (exempt, regular, alternative minimum tax, corporate, trust), state of residence, net operating losses, or other unique circumstances, such as the arbitrage rebate rate for proceeds from state and local government bond issues. 

Next is understanding any cash flow requirements that may exist, along with the investor’s market risk tolerances for credit and interest rates.  By understanding tax/regulatory-related information, cash flow requirements (if any), and investor risk tolerances, the appropriate taxable or tax-efficient strategy can be selected. 

Once the strategy has been selected, the process shifts to how to best position the portfolio within the context of current economic, interest rate, and relative value analysis at the fixed income asset class level.  Interest rate and relative value market analysis as well as asset/liability analysis provide guidance for yield curve positioning and asset class selection.  Individual security selection is the last stage in the initial portfolio construction process.