Fixed Income Factors: Theory and Practice

Abstract

Fixed income markets present unique considerations that many believe make the space prohibitive to factor investing. Examples include high transaction costs, limitations on shorting instruments, and the highly diverse set of constraints credit portfolio managers often consider during construction—potentially “washing out” any factor exposures. Despite these challenges, the authors document significant performance for style factors created using simple construction rules applied across US investment grade, US high yield, and emerging market bonds. The authors conclude with two case studies that investigate the level of factor exposure for active fixed income funds to demonstrate a success story and highlight opportunities for funds that lack factor exposure.