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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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How to find potential in volatile European high-yield markets?
Fixed Income Portfolio Manager Konstantin Leidman discusses why European high-yield investors need to be ready for both further volatility and the emergence of new opportunities.
The allocator’s landscape: Three areas of attention for 2023
Natasha Brook-Walters, Co-Head of Investment Strategy, discusses downside mitigation given the shifting equity/bond correlation, the impact of cyclical and macro volatility, and opportunities to position for long-term change.
High-yield bonds in 2023: Fortune favours the patient
Amid ongoing dislocation in the high-yield market, Fixed Income Portfolio Manager Konstantin Leidman sees opportunities for investors to take advantage of potentially attractive valuations.
Three tailwinds that could power CLO equity in 2023 and beyond
Three members of our fixed income team argue that the headwinds currently facing CLO equity should give way to improved returns in 2023 and beyond.
Inflation, rates, and volatility: The best defense is a good offense
Insurance Strategist Tim Antonelli shares his latest multi-asset views for insurers, including the need to balance defensive portfolio strategies with continued income and return generation.
In a new era for interest rates, can hedge funds fill the role of fixed income?
Hedge funds could be valuable building blocks for a fixed income substitute portfolio, but how should the portfolio be constructed? Members of our Fundamental Factor Team share their views.
Emerging markets debt outlook: A glass half full or half empty?
Against a still-challenging global backdrop for emerging markets, Macro Strategist Gillian Edgeworth highlights opportunities created by extreme credit spread dispersion across individual countries.
Bank of Japan policy shift: Waiting for the other shoe to drop?
Client Portfolio Manager Jitu Naidu and Investment Director Masahiko Loo share their take on the consensus view that Japan has reached several key inflection points.
2023 Macro and rates outlook: Goodbye easy money, hello regime change
Macro Strategist John Butler highlights the impact of macroeconomic "regime change" on global inflation and interest rates, with potential implications for investors.