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Quick Takes
Quick Clips: The Stock/Bond Correlation
Q2 2022
For the past two decades, the stock/bond correlation (SBC) has been consistently negative, and investors have been able to rely on their bond investments for portfolio protection when equities sell off. However, macroeconomic changes – like heightened inflation risk – could push this key asset allocation input into positive territory.
Journal Article
A Changing Stock-Bond Correlation
Q1 2023
For the past two decades, the stock/bond correlation – a fundamental detriment of risk in traditional portfolios – has been consistently negative. However, this hasn’t always been the case, and a positive stock/bond correlation could reappear due to macroeconomic changes. In this article, we assess the broad implications this would have for investors and set out practical steps to prepare for such an outcome.
Journal Article
Sustainable Systematic Credit
September 7, 2021
Interest in sustainable investing is now expanding into fixed income. This paper assesses how measures of sustainability/ESG might be relevant for corporate bonds and analyzes how ESG measures can be incorporated into an investment process to achieve the joint object of maximizing risk-adjusted returns and a sustainability target.
White Paper
What Drives Bond Yields?
July 26, 2021
In this overview of the various factors that influence government bond yields, we show that both in theory and in the data, non-monetary policy factors drive significant variation in yields, particularly at longer maturities. Despite the exceptionally low yield environments we have witnessed, fundamentals continue to drive bond markets.
Working Paper
Modeling Corporate Bond Returns
December 2, 2020
We propose a new conditional factor model for corporate bond returns with four factors and time-varying factor loadings instrumented by observable bond characteristics. We find our factor model excels in describing the risks and returns of corporate bonds, improving over previously proposed models in the literature by a large margin.
White Paper
It’s Not a Bound; It’s an Opinion
November 20, 2020
In the second paper of our “Bonds Today” series, we review the popular belief that bond yields are too close to zero to fall much further and then explain why we disagree.
Journal Article
(Systematic) Investing in Emerging Market Debt
March 4, 2020
We extend the analysis of systematic investment approaches to emerging market (EM) fixed income. We find that systematic exposures linked to carry, defensive, momentum and valuation themes are well compensated and lowly correlated in EM markets, and that a systematic approach to EM debt may be a powerful diversifier.
Working Paper
Beyond Basis Basics: Leverage Demand and Deviations from the Law of One Price
February 7, 2020
Bases are driven by intermediaries’ cost of capital and the amount of leverage demand for an asset. Focusing on leverage demand, we find bases negatively predict futures and spot market returns with the same sign in both global equities and currencies.
Journal Article
Active Fixed Income Illusions
December 17, 2019
Across a broad set of popular active fixed income categories, we find that passive exposures to traditional risk premia (especially exposure to credit risk) explain the majority of fixed income manager active returns.
Alternative Thinking
Inversion Anxiety: Yield Curves, Economic Growth, and Asset Prices
September 12, 2019
We evaluate the ability of the yield curve slope to forecast future economic conditions, as well as returns on stocks and bonds, using over 50 years of data across six countries.