Editor’s Letter

We begin this issue of The Journal of Fixed Income with two articles that apply style factors in the bond market to assess investment performance. In the first article, Joshua Kothe, Harald Lohre, and Carsten Rother define value, momentum, carry, and defensive rate factors. Furthermore, they provide empirical evidence of style factor positive performance, hedging, and diversification benefits. In the second article, Gueorgui Konstantinov and Frank Fabozzi show how currency carry strategies can be used to reduce the currency risk of the US dollar, improve excess return per unit of risk, and enhance diversification for fixed income and multi-asset portfolios.

In the next article, Arik Ben Dor, Jingling Guan, and Xiaming Zeng document that, abstracting from other bond price behaviors, there is a statistically significant predictive relationship between corporate earnings surprises and subsequent bond returns. Furthermore, they demonstrate that a trading strategy with a tilt toward positive earnings surprises outperforms the respective investment grade and high yield benchmarks.

Given the global pandemic and the Federal Reserve bond buying program, investors should be concerned with bond market liquidity. In the next article, Riccardo Rebonato and Hong Sherwin empirically identify funding and market measures of liquidity with very different reversion speeds. These measures do not require granular transactions data and are less likely to be confounded with non-liquidity related factors.

In times of market stress, we observe “flight-to-quality” price increases in treasuries relative to spread products. This negative conditional correlation is important information for hedging downside risk. In the next article, Zava Aydemir employs extreme value and copula theory to estimate these conditional correlations and their patterns between risk-on and risk-off periods.

Finally, Alexander Braun and Florian Schreiber advocate for an asset-liability performance measurement approach that is specific to the life insurance industry and contains information not included in existing measures.

We hope you enjoy this issue of the 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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