What are the main active management strategies in fixed income?

Question

AcadiFi · Accepted Answer

Active fixed-income management seeks to outperform a benchmark (e.g., Bloomberg US Agg) by taking deliberate, risk-controlled bets. CFA Level III organizes them into five main categories.

1. DURATION / INTEREST-RATE BETTING
Bet on the direction of rates. If you expect rates to fall, hold longer duration than benchmark. A 1-year duration overweight translates roughly to 1% gain per 100 bps of rate decline. Risk: wrong-way rate moves are painful.

2. YIELD CURVE POSITIONING
Bullet (concentrate at one maturity), barbell (ends), or ladder (evenly spaced). Benefits depend on expected curve shape changes. Example: expecting flattening → barbell outperforms bullet. Expecting steepening → bullet wins.

3. SECTOR / CREDIT ROTATION
Overweight sectors expected to outperform (e.g., financials during credit cycle recovery) and underweight others (e.g., retail during consumer stress). Use spread analytics (OAS, CDX levels) to time entries.

4. SECURITY SELECTION
Within a sector, pick undervalued names. Relative value analysis: compare individual bonds' spreads to peer averages, considering liquidity, call risk, rating changes. Earn 5-30 bps per year from selection.

5. INTER-MARKET / GLOBAL ROTATION
Allocate across markets (US, EU, EM, UK) based on relative value and currency views. More sophisticated active managers.

Risk budget framework (CFA):
- Tracking error budget (e.g., 80 bps vs benchmark).
- Allocate to each active bet: 30 bps duration, 20 bps curve, 20 bps credit, 10 bps selection.
- Expected information ratio per bet.
- Sum with correlations to check total TE.

Example: Oakbridge Fixed Income Fund runs 100 bps TE against Agg. Budget: 40 bps duration, 30 bps sector rotation, 20 bps security selection, 10 bps currency. Expected alpha: 60 bps; expected IR: 0.6. A typical active FI alpha bar.

Measurement: use Campisi performance attribution (split return into Treasury effect, premium effect, currency effect, selection).

What are the main active management strategies in fixed income?

Master Level III with our CFA Course

Related Questions

Practice Questions