Factors in Fixed Income? It’s (Not So) Academic.

Key points

  • The recent retraction of an academic paper after another paper highlighted key errors in its methodology underscores the challenges in applying equity factor research to corporate bonds. Less reliable pricing data, higher transaction costs, and security fragmentation and availability issues in credit markets are among several challenges to implementing factor-based fixed income strategies.
  • Within BlackRock Systematic, our fixed income strategies validate our research1 that generating active returns can build off of factors in fixed income markets to manage bond portfolios effectively.
  • Our Investment Grade and High Yield ETFs seek to track indices that combine two diversifying insights, company quality and valuations, to deliver strong risk-adjusted returns relative to standard benchmark indices.

The use of “factors,” or broad and persistent drivers of investment returns, has grown rapidly in equity markets, but with less adoption in fixed income. Recently, deficiencies in academic literature on the topic led to the retraction of a paper on factors in corporate bonds.2 Beyond identifying fundamental errors in the work, the researchers found a lack of differentiation in the behavior of individual fixed income factors and generally failed to uncover an investment advantage from factors relative to benchmark returns when trying to replicate the original published research.

This raises key questions for bond investors. Does factor investing work in fixed income? Can bond investors benefit from the same differentiation between factor, beta, and alpha-seeking return sources as equity investors? In this insight, we’ll explore the long-standing difficulties of applying a factor lens to fixed income investing and whether those challenges can be overcome to help investors build more effective bond portfolios. In contrast to the academic debate, our systematic investment approach that builds off fixed income factor insights has delivered a track record outperforming both market benchmarks and peers.