Fixed Income Chart of the Week

August 3, 2020: From Duration to Downgrade: The Surprise Transformation of US IG Risk


  • The chart shows the contribution to forecast variance from each group of factors in the Axioma Factor-based Fixed Income Risk Model, for a liquid USD investment grade benchmark, based on overlapping monthly factor returns.
  • The model captures credit risk using market intercept, sector, quality, country and style factors. In addition the model captures issuer and bond specific risk by leveraging the Axioma Fixed Income Spread Curve dataset.
  • The chart captures the rapid change in the risk profile of USD IG at the onset of the COVID-19 crisis. Spreads widened rapidly and the dominant contributing risk factor switched to credit risk from interest rate risk, which due to negatively correlated returns became a risk diversifier. The credit risk is dominated by the Credit Market Intercept which captures the average movements of spreads globally. The IG risk profile now resembles that of high yield, as discussed here.
  • The contribution from style factors also increased dramatically. This was dominated by the Beta style factor, and we discuss this in more detail here.
  • Spreads have tightened a bit since their peak in March, but credit and style risks continue to dominant the risk profile.

Source: Qontigo



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