Rates Factors and Global Asset Allocation

Abstract

Style factors that are prominent in other asset classes, such as carry, value, momentum, and defensive, do extend to the fixed income domain as well. We investigate factor investing across global government bonds and the use of such rates factors for a multi-asset investor. These rates factors significantly improve the investment opportunity set of investors, representing valuable tail hedges and offering diversification potential. Furthermore, complementing conservative multi-asset strategies by rates factors can enhance returns and reduce the likelihood and severity of downturns not only in-sample, but also in out-of-sample portfolio simulations.

TOPICS: Factor-based models, style investing, fixed income and structured finance

Key Findings

• • Style factors that are prominent in other asset classes, such as carry, value, momentum, and defensive, do extend to the fixed income domain as well.

• • These rates factors significantly improve the investment opportunity set of multi-asset investors, representing valuable tail hedges and offering diversification potential.

• • Complementing conservative multi-asset strategies by rates factors can enhance returns and reduce the likelihood and severity of downturns not only in-sample, but also in out-of-sample portfolio simulations.