Abstract
We examine the impact on relative success of bond fund managers under different market conditions defined by changes in bond yields and both longitudinal and cross-sectional volatility in the bond market. We analyze rising yield regimes and periods of increasing volatility to show that the active management opportunities in the bond market and the effectiveness of bond fund manager skills are time-varying. Even after accounting for style biases, both cross-sectional dispersion and time-series volatility measurably impact manager outperformance, thus providing fixed income managers with an opportunity for active management. Time-varying opportunity indicators can be utilized to employ timing between active and passive strategies, thereby producing economically significant information ratios and demonstrating the benefits of time-varying active risk budget.
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