Factor investing in fixed income securities

ijeab/iStock via Getty Images

By Theodoros Georgantonis

Widely associated with equities, the use of factors is gaining ground as a means of identifying opportunities within the fixed income universe.

Factor investing has been a staple of stock markets since the early 1990s. However, its growth in fixed income markets has been slower, primarily due to structural issues such as limited data availability, limited liquidity weaker and a larger universe of issuers. In recent years, we have expanded our quantitative efforts to include analysis of fixed income securities – and certain portfolios – based on factor exposures.

A key question is: why should investors consider factor investing in fixed income securities? The answer is that factor research complements fundamental research by identifying uncorrelated risk factors that may generate more efficient returns at the portfolio level. Additionally, we have observed that investing in these risk factors tends to generate persistent and actionable risk premia across market cycles. Based on our work, we believe that two conclusions are important:

First, certain factors (similar in some cases to stock-related factors) tend to be correlated with persistent excess returns. Importantly, our work controls for bond characteristics and “beta” characteristics such as duration, spread, industry, rating, etc. volatility, size, illiquidity and quality.

Second, we find that a factor approach has continued to work in the rising rate environment and widening credit spreads that we have seen in recent months. During this period (December 1, 2021 to February 11, 2022), we found (in our hypothetical internal analysis) that five of the seven factors contributed positively or had a stable performance for a hypothetical portfolio of fixed income securities.

Going forward, we expect factor-based approaches within fixed income investing to continue to grow in importance. As investors face an increasingly complex investment environment, the potential for capturing uncorrelated returns and building more efficient portfolios will only grow in importance for bond investors.

This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice. This document is of a general nature and is not addressed to any category of investors and should not be considered as individualized, a recommendation, investment advice or a suggestion to undertake or refrain from any action related to investment. Investment decisions and the suitability of this document should be made based on the individual objectives and circumstances of the investor and in consultation with their advisers. The information is obtained from sources believed to be reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this document and is subject to change without notice. The company, its employees and its consulting accounts can occupy positions in all the companies mentioned. The views or opinions expressed may not reflect those of the company as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all types of customers. This material may include estimates, outlooks, projections and other “forward-looking statements”. Due to various factors, actual events or market behavior may differ materially from the views expressed.

Investing involves risk, including possible loss of capital. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Indices are unmanaged and not available for direct investment. Past performance is not indicative of future results.

This document is published on a limited basis by various worldwide subsidiaries and affiliates of Neuberger Berman Group LLC. Please visit for specific entities and jurisdictional limitations and restrictions.

The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC.

© 2009-2022 Neuberger Berman Group LLC. All rights reserved.

Original post

Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.