Low-Risk Anomalies in Global Fixed Income: Evidence from Major Broad Markets

Abstract

This article presents the most compelling empirical evidence yet of a low-risk anomaly in fixed-income markets. The authors show that portfolios invested in bonds with the lowest risk would have delivered the largest positive alpha and highest Sharpe ratios, and portfolios invested in riskier bonds would have delivered the most negative alpha and lowest Sharpe ratios. The results proved extremely robust and were confirmed for government bonds, quasi-government and foreign government bonds, securitized and collateralized bonds, corporate investment-grade bonds, corporate high-yield bonds, emerging market bonds, and aggregates of some of these universes. They considered bonds denominated in USD, EUR, GBP, and JPY separately, and the results proved invariant to the currency. The authors confirmed the robustness of the results by using different measures of risk. The results were produced using data from the Bank of America Merrill Lynch database from January 1997, which includes 85,442 individual bonds in the 192 months analyzed.

TOPICS: Fixed income and structured finance, factor-based models, developed