Do Credit Factor Premiums Exist?
The majority of academic literature on factor investing has focused on equity, rather than debt markets, yet it may be possible to apply factors such as momentum, size, or quality to bonds as well.
This list of papers focuses upon credit factor analysis and ways to integrate different credit factors into a portfolio management process.
The latest version of Invesco's Risk & Reward publication covers a host of different themes. The featured article is on active fixed income strategies, and how their performance is actually being driven by factor exposures.
FTSE Russell looks at the value factor in fixed income, using an OAS framework to designate undervalued and over-valued securities. This study focuses upon the US investment grade corporate bond market.
Factor investing works in the equity market because of forces like investor behavior, market constraints, and regulations (amongst other reasons), but these forces could also apply to the corporate debt market. Robeco presents several rationales for utilising factors in corporate credit.
Hermes has developed a model that examines the ways that ESG factors influence credit spreads; then they mapped this relationship onto their own ESG-risk curve.
Fixed income is the new frontier for factor investing. Pursuing value, momentum, quality or low volatility strategies in bond and credit markets is yet to reach the levels of popularity enjoyed on the equity side of portfolios. This could be about to change.
Robeco explains that conceptually, and from a results-oriented standpoint, it may be possible to apply factor investing just as well to the corporate bond market as they have been applied to equities.
S&P Dow Jones Indices shows how low risk / low vol investing can be applied to the realm of fixed income, specifically by using the DTS measure and the MCR approach to screen for risky bonds.
Introducing alternative risk factors into investment grade corporate bond investing (Amundi AM, 2019)
Amundi Asset Management examines the validity of factor investing within the corporate bond market, finding that both value and momentum are significant when looking at IG corp debt returns from 2003-2018.
AQR Capital Management examines factor premia related to the shape of the yield curve and in this way defines the value, momentum, and carry factors for fixed income.
This article was recently published in the CFA Institute's Financial Analysts' Journal. It examines the performance of size, low-risk, value, and momentum factor portfolios in the corporate bond market.
In this paper, the value and momentum factors are examined across multiple markets and multiple asset classes, exhibiting a negative correlation. The authors attribute a portion of this relationship to global funding liquidity risk.
The authors look at the momentum factor, piecing together a 215-year history of this particular factor premium across multiple asset classes, including government bonds, currencies, commodities, and equities.
Schroders explains that while factor investing within bond portfolios may sound puzzling to seasoned fixed income professionals, there are fundamental differences between factor investing in equity vs bond portfolios.