31 May 2018
Alpha Opportunities in Fixed Income
Markets have been volatile since the start of 2018, bringing greater focus onto the asset mix in client portfolios. Ahmed Talhaoui, CFA, Co-Head of Product Strategy for BlackRock’s Global Fixed Income Group discusses alpha opportunities in the fixed income market.
A changing fixed income landscape
“Emerging trends in the fixed income market pose an interesting new set of challenges for investors. A great deal has been made of US 10-year treasuries touching 3%. For the first time since the financial crisis, US dollar investors can earn positive after-inflation returns from more traditional bonds.”
Different sets of interest
“The first thing to remind ourselves of is the many roles fixed income plays. Income generation and liability matching are the two most obvious, closely followed by capital preservation. But fixed income also helps diversify from equity market risk and provides many opportunities for capital appreciation.”
Different sets of opportunities
“So what is the role of alpha in all of this? The simple answer is that bond markets are more fragmented and idiosyncratic than most other markets. A well-known investment grade firm may have tens of different types of bond in issuance at any one time – and each will have its own merits in terms of seniority, maturity, currency, coupon and myriad other considerations. Establishing the relative value of these different issuances can yield substantial alpha, but it requires rigorous analysis.”
Having what it takes
“Analysing and capturing these return opportunities takes skill, insight and experience. We try to look at the opportunity set through four main disciplines. Our security selection strategies focus on bottom-up opportunities, while our macro strategies seek to identify themes across the market. Add to that an assessment of when beta (market directionality) is most appropriate plus the use of carry (yield seeking) trades and there is a full armoury of investment strategies to capture returns in fixed income.”
Read the full article on BlackRock’s website.
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