Total and Absolute Return Strategies with Credits

Abstract

The introduction of the Euro has reduced the opportunities for Euro fixed income investors to generate an excess return over government bonds, for example, by earning risk premia or adding currency exposure to their portfolios. Therefore, they have increasingly focused on credit as the primary source of alpha. However, after the massive credit spread tightening in 2003 the potential for outperformance seems rather limited. Including investments in foreign currencies can be a viable way to earn excess returns for corporate bond investors. Yet many portfolio managers are restricted from taking on currency risk, leaving them only with the possibility to exploit inefficiencies in the pricing of credit across currencies. The crucial question then is whether there is a global corporate bond market, that is, whether there is sufficient comovement between the major credit markets that allows to identify mispricings between bonds from one issuer but in various currencies and to benefit from an eventual correction of this inefficiency. Hence, one has to address the issue of the degree of integration of credit markets, in particular the US, Euro, Sterling and Yen markets.KeywordsCredit RiskHedge FundExcess ReturnCredit Default SwapImplied VolatilityThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.