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2020 returns in many fixed income asset classes have been very strong, but how much is the result of falling base rates (i.e., lower UST yields), and how much is sector performance? 1/x
You can't simply take the total return of, say, an IG credit index and comp it to a UST index, since the duration characteristics are probably quite different.
BBG/Barc UST Index: 7.1
BBG/Barc IG Credit Index: 8.7
Those are modified duration numbers. 2/x
BBG/Barc UST Index: 7.1
BBG/Barc IG Credit Index: 8.7
Those are modified duration numbers. 2/x
Since the IG credit index is a good bit longer than the UST index, if rates fall (lets assume parallel curve shifts for simplicity), then IG credit will outperform by about 160bps per each 1% yields decline. 3/x
To measure the differential more cleanly, we can use something called EXCESS RETURN, which in FI Index land you can basically think of the return impact of relative coupon plus the return impact of spread changes. 4/x
Excess return sort-of answers the question "was my sector exposure worth it relative to rates exposure?" That's a little too simplistic, since you've got to consider volatility as well, but it's good enough for this thread's purposes. 5/x
With 3.5 trading days left in 2020, IG credit produced a *slightly* positive excess return. A rated names registered +47bps and Baa names +33bps. 6/x
But whoa, look at those drawdowns. -988bps for A and 1673bps underperformance for Baa names at March EoM (which was basically the lows). 7/x
Was IG credit exposure worth it in 2020? My 2bps is that a buy and hold strategy with a Dec 31 entry and exit point massively underperformed on any vol-adjusted basis. 8/x
Of course that's an artificial rule, and many high profile managers were able put capital to work in Mar/Apr, generating massive upside, even in IG credit. 9/x
And since most of you are just here for my Simpsons GIFs...here's one that credit managers who survived Mar/Apr can sympathize with all too well.
Fin/10.
Fin/10.
