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Applying Factors to Fixed Income Portfolios

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.

Savvy Investor

Applying factor investing to corporate bonds (Robeco, 2018)
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.

Why should investors consider credit factors in fixed income? (Invesco, Apr 2018)
(For compliance reasons, this paper is only accessible in certain geographies)
Invesco believes that the underlying reasons for the existence of factors are not specific to each asset class, making them applicable to fixed income portfolios as well. They go into further detail with a new four-factor credit model.

Bond ETFs and Credit Derivatives (2018 Guide to ETFs and Derivatives, BlackRock)
(For compliance reasons, this paper is only accessible in the United States)
In this subsection of BlackRock's 2018 Guide to ETFs and Derivatives, the authors address they ways in which tactical asset allocation can help investors to manage fixed income risk and liquidity.

Incorporating ESG Factors into Sovereign Bond Analysis (Franklin Templeton, 2018)
(For compliance reasons, this paper is only accessible in the EMEA region)
John Beck of Franklin Templeton speaks about the incorporation of ESG factors into an analysis of sovereign bonds and the increasing importance of such factors.

Video: Demystifying the Quality Factor in Equities and Bonds (SSGA, May 2017)
Jenn Bender and Riti Samanta of State Street Global Advisors discuss their recent paper, “Quality Assurance: Demystifying Quality in Equities and Bonds”, in this video.

Factor Investing in the Corporate Bond Market (Financial Analysts Journal, 2017)
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.

The Low Volatility Factor in U.S. High Yield Corporate Bonds (S&P Dow Jones Indices, 2017)
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. 

Fact or Fiction? Bond investors can add returns with factor-based investing (Schroders, 2018)
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.

Value and Momentum Everywhere (Asness, Moskowitz and Pedersen, 2013)
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.

Two Centuries of Multi-Asset Momentum (Equities, Bonds, Currencies, Commodities, Sectors, Stocks) Geczy & Samonov, 2017
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.

Intrinsic Momentum is also important for bonds (Robeco, 2018)
Robeco investigates the momentum factor within credit markets. Similar to other examinations of the US bond market, they found that for Euro-denominated debt a momentum premium existed for high yield bonds, but not for IG bonds.

Yield Curve Premia (AQR Capital Management, 2017)
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.

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