Fixed income investing can be broken down into factor-based decisions. The risks of fixed income can be described through three main factors, the Treasury rate, growth, and volatility. The Treasury rate explains the variation with the bell-weather 10-year, the growth factor looks at a combination of the global equity and high yield excess returns, and a volatility factors as measured by the change in the VIX index. This is a simple approach but gets at the heart of the factor approach. Holding a credit-based portfolio is very different than a the Barclay's Aggregate index. With credit or emerging market fixed income index, you are holding a growth focus while the Agg is just rate focused. Volatility exposure is not important except for credit and emerging markets.
This work is outlined in "Factor Approach to Fixed Income Allocation" in the Journal of Investing, spring 2016. The factors do not sum to one. When tested as a three factor approach which are forced to sum to one, the volatility factor drops to zero.
All fixed income sectors are not alike and a balance between rate and growth will require a balance between credit and a more general bond index. More can be done than what is presented in this very simple factor approach but it serves as a good first pass on the issues associated with a fixed income factor approach.
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