Editor’s Letter

Fixed income performance can be broken down into at least security selection and sector rotation. We begin this issue of The Journal of Fixed Income with an article by Jordan Brooks, Tony Gould, and Scott Richardson that shows superior fixed income manager performance relative to its benchmark is primarily due to overweighting credit risk rather than picking undervalued bonds (true alpha). Passively overweighting the credit sector does not require any special insight, but the practice does reduce diversification.

In the next article, J. Benson Durham investigates the relationship between US Treasuries as a safe asset based on the correlation between bond and stock returns. The evidence indicates that Treasuries are not consistent hedges for major stock market declines. Then, Jérôme Gava, William Lefebvre, and Julien Turc identify the key factors of government bond futures that are most relevant. Beyond carry and momentum, they include value and reversal factors from broad movements in interest rates.

Do you think that corporate ties to politicians have value? Yun Meng provides evidence that the relationship adds value by generating lower yields on bond issues—and more so for below investment grade bonds when the issuer is dependent on government spending and there is less information clarity. In the next article, Jonathan Hartley describes the issuance of dollar- versus non-dollar-denominated emerging market debt and the violation of covered interest rate parity. Consequently, there are arbitrage opportunities for investors, and emerging market countries could issue debt in dollars, swap the proceeds to non-dollar currencies and save more than a billion dollars annually.

Finally, Alexander Braun and Jiahua Xu provide a methodology to price death bonds, derived from a combination of historical yield spreads and their model for discount rates.

We hope you enjoy this issue of The Journal of Fixed Income. Your continued support of the journal is greatly appreciated.

TOPICS: Fixed income and structured finance, fixed-income portfolio management, portfolio theory

Stanley J. Kon

Editor

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