Investing in US Core Fixed Income with Macro and Style Factors

Posted: 18 Oct 2021 Last revised: 23 Nov 2021

See all articles by Eugene Pauksta

Eugene Pauksta

BlackRock, Inc

Karishma Kaul

Blackrock

Tom Parker

BlackRock, Inc - San Francisco

Scott Radell

BlackRock, Inc

Andrew Ang

BlackRock, Inc

Date Written: October 5, 2021

Abstract

We harvest factors—broad and persistent sources of returns—in US core fixed income in three ways. First, we take strategic over and underweight positions in certain macro factors. While strategic overweights to rates, or duration, and credit factors have historically resulted in outperforming fixed income benchmarks, we find the long Treasury sector as the most efficient way to capture rates exposure and short-duration corporate bonds maximize risk-adjusted returns for credit exposure. Second, we time the allocation to rates and credit factors, along with changing high yield and mortgage exposures. Third, we use style factors to select securities. We incorporate a value tilt in Treasuries, and value and quality factors in investment grade and high yield sectors. Incorporating factors in these ways and building an optimized portfolio to control for deviations relative to the market index has resulted in an information ratio of 1.67 over January 2007 to March 2021.

Keywords: Macro factors, style factors, factor timing, US core index, fixed income

JEL Classification: G1, G10, G11

Suggested Citation

Pauksta, Eugene and Kaul, Karishma and Parker, Tom and Radell, Scott and Ang, Andrew, Investing in US Core Fixed Income with Macro and Style Factors (October 5, 2021). Available at SSRN: https://ssrn.com/abstract=3942680 or http://dx.doi.org/10.2139/ssrn.3942680

Eugene Pauksta (Contact Author)

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

Karishma Kaul

Blackrock ( email )

55 East 52nd Street
New York City, NY 10055
United States

Tom Parker

BlackRock, Inc - San Francisco ( email )

400 Howard Street
San Francisco, CA 94105
United States

Scott Radell

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

Andrew Ang

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

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