Fixed-Income Extension: The Long and Short of Expressing Negative Views

Abstract

Short-extension strategies are rarely used in fixed-income management, yet the market-capitalization weighting of bond indices and the asymmetrical risk–return profile of bond returns make such a strategy a natural fit, particularly in credit portfolios. Implementing the strategy in credit portfolios is facilitated by the widespread use of credit default swaps and the clear-cut regulatory framework. Investors who use short-extension strategies can expand their portfolio’s efficient frontier and information ratio and not simply leverage their returns.