Investment-grade Corporate Bonds Research Articles

The Term Structure of Mutual Fund Herding

This paper investigates herding behaviors in U.S treasury markets. We document novel evidence that mutual funds exhibit strong herding behaviors on trading long-term treasuries. This “term-structure” herding is only pronounced for buy herding, not sell herding. The relationship between herding and time-to-maturity is stronger for funds with high fund flow volatility. Such behaviors also exist for Treasury Inflation Protected Securities (TIPS) and for treasuries with both high and low coupon rates, suggesting that herding is not driven by correlated inflation expectations. Similar results are obtained for investment-grade corporate bonds as well. Overall, our results suggest that mutual funds’ short investment horizons contribute to the term-structure herding behaviors in the bond markets.

Price Impact of Corporate Bond Trading: Evidence from the Australian Securities Exchange

This study examines the price effects of investment-grade–corporate bond transactions on the Australian Securities Exchange (ASX). Results indicate that both purchases and sales of exchange traded corporate bonds incur significant transaction costs upon execution. Post execution, purchases of all sizes either experience price continuations, or no significant price reversals, suggesting the presence of information. Sales of all sizes experience complete price reversals, implying that selling corporate bonds conveys no information to the market. These results are consistent with the majority of equity market studies that document a similar asymmetry between purchases and sales. Analysis of the determinants of price effects associated with bond market trades reveals that trade-size, market conditions, underlying stock price volatility, underlying stock turnover, bid–ask spreads (BAS), and market depth are associated with the magnitude of price movements surrounding these trades. Contemporaneous equity returns appear to have no effect on the price impact of corporate bonds.

Residual Equity Momentum Spillover in Global Corporate Bond Markets

This article presents an improved equity momentum measure for corporate bonds, using the euro-denominated global investment-grade corporate bond market from 2000 to 2016. The author documents economically meaningful and statistically significant corporate bond return predictability. In contrast to the widely used total equity return, momentum as measured by the residual (idiosyncratic) equity return appears to further enhance risk-adjusted performance of corporate bond investors. Additional support for this conjecture is obtained from tests for various asset pricing factors and transaction costs, as exposure to these risk factors cannot explain this abnormal pattern in returns.

Predicting bond betas using macro-finance variables

We predict bond betas conditioning on a number of macro-finance variables. We explore differences across long-term government bonds, investment grade corporate bonds, and high yield corporate bonds. We conduct out-of-sample forecasting using the new approach of combining predictor variables through complete subset regressions (CSR). We consider the robustness of CSR forecasts across the 1-month, 3-month, and 12-month forecasting horizons. The CSR method performs well in predicting bond betas.

Exploiting uncertainty with market timing in corporate bond markets

The purpose of this article is to show the usefulness of technical analysis in credit markets. We document that an application of a simple moving average timing strategy to US high-yield and US investment-grade corporate bond portfolios sorted by option-adjusted spread generates investment timing portfolios that substantially outperform the corresponding benchmark. For portfolios with high uncertainty, as measured by the option-adjusted spread, the abnormal returns generate economically and statistically significant returns relative to the capital asset pricing model, the four-factor model and additionally the bond factor model from Asness et al. (J Finance 68:929–985, 2013). Our results remain robust to different moving average formation periods, transaction costs, long–short portfolio construction techniques and alternative definitions of information uncertainty.

Exploiting Uncertainty with Market Timing in Corporate Bond Markets

The purpose of this article is to show the usefulness of technical analysis in credit markets. We document that an application of a simple moving average timing strategy to U.S. high yield and U.S. investment grade corporate bond portfolios sorted by option-adjusted spread generates investment timing portfolios that substantially outperform the corresponding benchmark. For portfolios with high uncertainty, as measured by the option-adjusted spread, the abnormal returns generate economically and statistically significant returns relative to the capital asset pricing model (CAPM), the Carhart 4-factor model and additionally the bond factor model from Asness et al. (2013). Our results remain robust to different moving average formation periods, transaction costs, long-short portfolio construction techniques and alternative definitions of information uncertainty.

A Conditional Variance Model of Corporate Bond Excess Return Distributions

The author presents a model that addresses the dynamic and asymmetric nature of corporate bond excess return distributions. The model forecasts the distribution of monthly corporate bond excess returns conditional on credit spreads, spread duration, and market share. Relative to an approach based on credit ratings, the distribution of standardized residuals of the conditional variance model more closely approaches the standard normal distribution. Over time the model accurately forecasts changes in corporate bond volatility and reflects cross-sectional differences in the volatility of bond cohorts defined by credit rating, industry, and maturity. U.S. investment grade corporate bonds are the focus of the analysis, but the author also presents results for a high yield model.

Multidimensional Copula Models for Parallel Development of the Us Bond Market Indices

Abstract Stock and bond markets co-movements have been studied by many researchers. The object of our investigation is the development of three U.S. investment grade corporate bond indices. We concluded that the optimal 3D as well as partial pairwise 2D models are in the Student class with 2 degrees of freedom (and thus very heavy tails) and exhibit very high values of tail dependence coefficients. Hence the considered bond indices do not represent suitable components of a well-diversified investment portfolio. On the other hand, they could make good candidates for underlying assets of derivative instruments.

Remaking the corporate bond market: The state and evolution of the European investment grade corporate bond secondary market

Two years on from the first International Capital Market Association (ICMA) study into the state and evolution of the European investment grade corporate bond secondary market, this new study seeks to assess how the market has evolved in that time and, in doing so, to address three fundamental questions: (1) What do we mean by market liquidity and how is this changing, if at all? (2) How are market participants adapting and evolving their business models in response to any changes in market conditions? (3) What is the future of the market and what factors are most likely to affect liquidity? In attempting to answer these three questions, the study utilises a triangular approach of quantitative and qualitative data collation and analysis. The study concludes that, for the most part, the ability either to source or provide secondary market liquidity continues to be challenged. Yet, despite a more challenged environment, the general mood of most stakeholders remains relatively upbeat as market participants adapt. Furthermore, the study notes that corporate issuers themselves are becoming increasingly concerned by secondary market liquidity conditions. Finally, the study suggests that from the perspective of many participants, the current market model is not sustainable, at least not in the long-term, and certainly not post-central bank intervention.

Predicting Bond Betas Using Macro-Finance Variables

We conduct in-sample and out-of-sample forecasting using the new approach of combining explanatory variables through complete subset regressions (CSR). We predict bond CAPM betas and bond returns conditioning on various macro-finance variables. We explore differences across long-term government bonds, investment grade corporate bonds, and high-yield corporate bonds. The CSR method performs well in predicting bond betas, especially in-sample, and, mainly high-yield bond betas when the focus is out-of-sample. Bond returns are less predictable than bond betas.

A New Test for Cross-Sectional Momentum

This paper revisits the empirical finding that there is no momentum in the cross-section of investment-grade corporate bonds. Using a comprehensive dataset of investment grade and high yield USD corporate bonds from 1994 to 2015, I find that the large dispersion in volatility between corporate bonds causes standard decile portfolio sorts to be far from an optimal momentum portfolio as suggested by theory. Scaling bonds, i.e. momentum signals and positions, with an ex-ante estimate of volatility remedies this problem and reveals significant momentum effects. The momentum effect cannot be attributed to systematic risk, is robust to the choice of the ex-ante volatility measure, is present across formation and holding period lengths and is not driven by liquidity.

The Life Insurance Industry and Systemic Risk: A Bond Market Perspective

The 2008 financial crisis brought a focus on the potential for a large insurance firm to contribute to systemic risk. Among the concerns raised was that a negative shock to insurers could lead to a fire sale of corporate bonds, a market where insurers are among the largest participants. This manuscript discusses the existing evidence on life insurance firms and systemic risk, with a focus on the investment-grade corporate bond market. We provide some tentative evidence that life insurers tend to absorb liquidity risk by purchasing bonds when the bonds are less liquid than average. However, we do not find evidence that insurers increased bond purchases specifically during the financial crisis, leaving open the question of whether insurers would play a stabilizing role in a future crisis.

Liquidity and Market Efficiency: Cash Corporates, ETFs, and CDX

Market efficiency is an important topic for academics and practitioners. The main characteristic of efficiency is how accurately and quickly asset prices reflect available information. Among the reasons why they may not reflect this information is insufficient liquidity of the market. Using our proprietary measures of liquidity, we investigate the informational efficiency of the USD investment-grade corporate bond market. Our approach is to measure price inertia over time, which we consider a good proxy for market efficiency. Using both monthly and daily return series, we compare price inertia in 10 liquidity strata and find that the more liquid segments of the market have considerably less price inertia and are therefore considerably more efficient than the less-liquid segments. We also investigate the efficiency of corporate bond exchange-traded funds and CDX. We find that both display considerably less price inertia and more efficiency than even the most liquid segment of the traditional, cash corporate market and also lead that segment.

Frontier and emerging government bond markets

We investigate correlation dynamics and diversification properties of US dollar-denominated debt issued by governments of frontier markets. Our analysis is on the aggregate, regional, and country level, with a sample covering 29 countries over the period 2001–2013. We show that the correlation between the returns of frontier government bond markets and US government bonds is time-varying, but on average close to zero. Correlations with US investment grade corporate bonds, US corporate high yield bonds, and US dollar-denominated debt issued by governments of emerging markets are substantially higher, which limits diversification benefits for investors who already own these asset classes.

Covenants in European investment-grade corporate bonds

Covenants are a type of contractual protection for creditors in debt financing. They are used in bond contracts to control the issuer’s management activity and to attenuate conflicting goals existing between shareholders and bondholders. The article provides an overview of covenants and the way they function against the background of financial theory. It further provides detailed data on how often covenants are actually used in corporate bonds issued predominantly by European issuers. Examining the rights of fixed-income investors vis-a-vis bond issuers contributes to the increasingly significant and growing research on debt governance, which addresses, inter alia, the optimal drafting of bond contracts.

Covenants in European Investment-Grade Corporate Bonds

Covenants are a type of contractual protection for creditors in debt financing. They are used in bond contracts to control the issuer’s management activity and to attenuate conflicting goals existing between shareholders and bondholders. The article provides an overview of covenants and the way they function against the background of financial theory. It further provides detailed data on how often covenants are actually used in corporate bonds issued predominantly by European issuers. Examining the rights of fixed-income investors vis-a-vis bond issuers contributes to the increasingly significant and growing research on debt governance, which addresses, inter alia, the optimal drafting of bond contracts.

The Impact of Fallen Angels on Investment Grade Corporate Bonds Portfolios: Evidence from the European Market

The Impact of Fallen Angels on Investment Grade Corporate Bonds Portfolios: Evidence from the European Market

Duration Targeting: No Magic for High-Yield Investors

Over time, the annualized return of a duration-targeting, investment-grade corporate bond portfolio will nearly match its initial yield. A high-yield bond portfolio’s performance is not similarly predictable. Furthermore, the difference between the high-yield universe’s initial yield and annualized return has a sharply negative bias. The absence of benefits from duration targeting has a bearing on valuation of the high-yield asset class and helps explain the instability in its investor base.

Diversification Benefits of Investment-Grade Corporate Bonds

Irritated by the current sovereign debt crisis, many institutional investors seek an alternative to traditional bond investments which are often tied to sovereign bond dominated indices. We analyze the diversification benefits of investment-grade corporate bonds, segmented by ratings, relative to a benchmark portfolio of ten equity indices and a sovereign bond of the same currency. Using regression-based spanning and intersection tests, we find that corporate bonds improve the risk-return trade-off, in particular due to their beneficial diversification properties. Partitioning the sample reveals that parts of these effects persist even during the financial crisis.

On the Performance of Fixed-Income Exchange-Traded Funds

The authors evaluate the performance of fixed-income exchange-traded funds (ETFs). They find that Treasury ETFs are indeed able to track their benchmarks but that investmentgrade corporate bond ETFs underperform their benchmarks and high-yield corporate bond ETFs severely underperform their benchmarks. They provide evidence that the transaction costs of the underlying bonds are a key determinant of an ETF’s underperformance. The authors conclude that indices consisting of bonds that are more costly to trade are more difficult to track. <b>TOPICS:</b>Exchange-traded funds and applications, mutual fund performance, portfolio construction