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Thus far in 2022, outright exposure to two primary fixed income risk factors — duration and credit spreads — has proved challenging. As a result, investors are increasingly seeking innovative and differentiated ways to protect their bond portfolios amid unprecedented market volatility.
Interestingly, from our fundamental factor-based perspective, there has been a consistent bright spot across global government bond and corporate credit markets: Momentum has proven to be a highly diversifying exposure on a year-to-date basis, which we think speaks to the persistence of the market environment during the first half of the year. In this brief note, we’ll focus on global government bonds, though we’ve seen comparable results for momentum in corporate credit.
In our framework, momentum within global government bond markets has been among the best-performing factors this year, in both absolute and risk-adjusted terms. In fact, the magnitude of the outperformance has reached historic proportions, with 2022 on pace to be a record year for the style in the post-GFC era.
In Figure 1, we highlight the year-to-date performance of our proprietary Rates Momentum factor through September 30. The factor returned nearly 6% while the broader global government bond market realized double-digit negative total returns.
How is this different from just highlighting an underweight to duration risk? It is true that recently momentum has generally been underweight most global government bond markets. However, in previous periods of heightened market volatility, such as the early days of the COVID-19 pandemic (March 2020), this style has shown the potential to provide downside protection to risk assets such as equities and credit. In these prior events, we observed momentum as being overweight duration risk at select sovereign curve points, which makes sense given the declining interest-rate trend at the time.
We believe a key benefit of utilizing a style-oriented fundamental factor framework is that it follows a rules-based process of naturally sorting through the market opportunity set. This may provide the potential for a more dynamic active risk profile, offering allocators an alternative solution that is less reliant on static traditional beta exposures.
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Monthly Market Snapshot — December 2022Continue reading
Spread the risk: Our top three fixed income diversifiers for 2023Continue reading
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February Fed meeting: Chair Powell strikes a more optimistic tone
The Fed just might still be able to engineer the hoped-for "soft landing" but it's not going to be easy, says Fixed Income Analyst Caroline Casavant.
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A quarterly update on equity, fixed income, currency, and commodity markets.
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A monthly update on equity, fixed income, currency, and commodity markets.
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Take credit: Our five best credit market ideas for 2023
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Portfolio Managers Brij Khurana, Brian Garvey, and Nick Petrucelli believe many observers are underestimating the severity of a potential US recession this year.
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