Dimensions of Return in the Fixed Income Markets

Investors use fixed income securities to achieve a variety of investment goals. These goals can generally be divided into four broad categories: total return, customization of the overall portfolio risk profile, liability management, and capital preservation in real or nominal terms. More than four decades of research (by both academics and practitioners) suggest that the duration, credit quality, and diversification of a fixed income strategy are among the main considerations an investor must take into account when choosing a strategy designed to achieve those goals. Research also indicates that investors can use information in global yield curves and credit spreads to increase expected returns and/or manage risk within duration and credit quality ranges that are consistent with those goals. For example, an investor who desires capital preservation can use information in current prices in an attempt to dynamically capture the time-varying term and credit premiums among global, short-term, high quality bonds. In this way the investor may strike a better trade-off between expected return, expected volatility, and the capital preservation goal.

One very real and practical implication of the research into fixed income markets is that the duration ranges, yield curves, and credit quality ranges a strategy invests in can all be customized to meet individual objectives and constraints and help investors better achieve their goals.

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