Systematic Fixed Income

CHAPTER 6Security Selection – Credit‐Sensitive Assets

OVERVIEW

This chapter lays out the investment opportunity set for credit‐sensitive assets. Our focus is on developed market corporate bonds, but the insights we cover can be extended to emerging market government bonds. We look at the vast number of investment grade (IG) and high yield (HY) corporate bonds in developed market indices and note the first order importance of across issuer security selection. While security selection among corporate bonds shares some similarities with security selection among stocks, we note important differences between credit and equity investing. The chapter discusses the intuition behind representative measures of value, momentum, carry, and defensive investment themes and evaluates the success of these strategies individually and in combination for developed corporate bond markets.

6.1 WHAT IS THE INVESTMENT OPPORTUNITY SET FOR DEVELOPED MARKET CORPORATE BONDS?

We will use a representative broad corporate bond index to explore the potential investment opportunity set. We will use indices from ICE/BAML for this purpose. To get a sense of the current size of the corporate bond markets, how those markets have grown over the past 20 years, and what the typical corporate issuer looks like, we examine four distinct categories of corporate bonds: (i) US IG includes all CAD‐ and USD‐denominated bonds issued by corporate issuers domiciled in developed markets within the ICE/BAML G0BC index, (ii) ...