PGIM Fixed Income wins "Best Fixed Income Paper 2019"
The fixed income market is very fragmented – different types of fixed income investors have unique constraints that apply to them. For instance, passive investors are concerned primarily with having a low tracking error compared to their benchmark index, so they are likely constrained to buying securities from index constituents. Similarly, money market investors must buy securities with maturities of one year or less. These types of constraints can lead to opportunities for fixed income investors that are not bound by the same requirements. PGIM Fixed Income’s winning paper describes these effects and the opportunity set for unconstrained, total return, multi-sector fixed income investors.
WINNER: PGIM FIXED INCOME
The fragmentation of fixed income markets presents unconstrained fixed income investors with an opportunity. This PGIM Fixed Income paper delves into the granular details of identifying relative value (through a framework that combines the components of OAS, rolldown, and credit migration), measuring and managing risk, and constructing multi-sector fixed income portfolios (with input from a principal component analysis).
Fallen Angels are bonds that have been downgraded in credit quality from investment grade to high yield. Fallen angels that are unexpected can significantly impact bond portfolio returns, and the risk of these occurrences is higher during recessionary periods. Moody's presents a metric for the identification of credit quality deterioration and finds that it is useful for predicting future fallen angels.
Traditional and Alternative Factors in Investment Grade Corporate Bond Investing (Amundi Asset Management)
For compliance reasons, this paper is NOT accessible in the United States
Amundi Asset Management investigates the presence of factor premia within investment grade corporate bond portfolios. They find that a duration-times-spread factor and a value factor with certain specifications have the most explanatory power, and go on to test whether a purified factor portfolio can be constructed that accounts for these premia as well as the complex and multifaceted nature of the investment grade corporate bond market.
This Mellon Capital paper is on the credit risk premium (CRP), and how it may be a better measure of expected excess return than the option-adjusted spread (OAS) for corporate bond investors. We are currently in a tight CRP environment, but it may still be a stable enough environment to capture positive returns and higher coupons from high yield debt.
This paper by BNP Paribas suggests that the European structured finance market has evolved, increasing the attractiveness of European asset-backed securities. Credit standards were not as loose as they were in the United States during the financial crisis. Additionally, new regulations have increased transparency for European ABS and CLOs.
Dynamic swap overlays may be better at hedging equity risk than long-duration treasuries. PIMCO analyzes optimal yield curve positioning, finding that these swap overlays may improve Sharpe ratios and reduce drawdown risk.
This paper from MFS charts the rise of corporate borrowing in the US and Europe against the backdrop of broader trends in credit. It also analyzes some of the principal investment considerations: credit quality, debt service, and risk compensation.
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