Insights

Systematic High Quality Corporate Fixed Income: August 2024

Both high grade systematic active fixed income strategies outperformed their benchmarks in August.
The Value factor drove performance in August and was the best-performing factor during the month.
Spreads have tightened in 2024 despite continued macroeconomic and central bank policy uncertainties.

October 3, 2024

Matthew Nest, CFA

Global Head of Active Fixed Income

Arkady Ho, CFA

Fixed Income Portfolio Strategist

Market Commentary

The higher-for-longer rates narrative that took hold in Q1 2024 gave way to softer data in Q2 that solidified signs of a broad macroeconomic slowdown:

Continued disinflation: Headline year-over-year CPI inflation fell from 3.5% in March to 2.5% in August.
Modest softening in labor market conditions: The unemployment rate rose from 3.8% to 4.2%.
More certainty on policy shift: The Federal Reserve signaled its intent to begin cutting rates in September.

As a result of these conditions, the 10-year US Treasury yield fell by about 100 bps from a local max of 4.7% in late April to well under 4% by mid-September (Figure 1).

Meanwhile, credit spreads had been on a steady tightening trend since Q4 last year through to mid-year, with investment grade (IG) spreads falling from 130 bps to 85 bps, and high yield (HY) spreads falling significantly from 437 bps to almost 300 bps. IG spreads widened by approximately 25 bps during the market volatility in early August; however, much of that move has now been retraced.

Factor Report

Alpha signals, closely related to style factors, are a key input in systematic fixed income. Indeed, the decisions about which securities to buy or sell are determined based on signal scores that measure a security or issuer’s exposure to [un]desirable style factors at a given point in time.

Factor investing, which has long served as a strategy for equity investors to understand and exploit alpha drivers discerned over time, is now becoming a more viable option for credit investors (see: The Case For Systematic in Credit). It allows investors to gain a different perspective on the key drivers of credit returns in various market environments. The factors we evaluate are in some cases informed by the equity performance of the issuers (see: Overview: Systematic Active Fixed Income Signals).

The Value Factor In this environment of general spread tightening, the Value factor performed very well in the first six months of 2024. The Value signal isolates the spread that is unaccounted for by issuer fundamentals or structural elements such as maturity. When elevated, this signal has empirically been shown to mean-revert over time. As the Value factor tilts towards higher yielding, higher spread bonds, it will tend to outperform as spreads tighten, hence the strong performance thus far in 2024.

The Momentum Factor The Momentum factor tends to perform better in market downturns, thereby complementing the Value factor which performs less well. The Momentum signal performed well early in the year and during the more volatile months of July and August, while struggling from March to June. Should a period of more sustained spread widening emerge, that is when we would expect to see the Momentum factor shine once again. At the security level, the Momentum factor did quite well in identifying issuers that were experiencing negative equity performance first, and then negative spread performance as earnings disappointed. For example, this pattern occurred with the bonds of BBB-rated chip maker Intel Corp. during the period.

Read More in the Full August 2024 Commentary.

Disclosures

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Important Risk Information

Investing involves risk including the risk of loss of principal.

The views expressed in this material are the views of the Fixed Income team through the period ended September 1, 2024, and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

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Past performance is not a reliable indicator of future performance.

Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.

Sample portfolio returns shown above are hypothetical and are based on the returns of the underlying market indices in the proportions shown above. The methodology used was taking the Bloomberg US Corporate Index, dividing it into quintiles from lowest to highest Value score, and measuring the returns. The Value score is a proprietary relative value score from Barclays QPS. Market indices are unmanaged and not subject to fees and expenses, which would lower returns. Neither index performance nor sample portfolio performance is intended to represent the performance of any particular mutual fund, exchange-traded fund, or product offered by SSGA. SSGA has not managed any accounts or assets in the strategies represented by the sample portfolios. Actual performance may differ substantially from the hypothetical performance presented. Past performance is not a guarantee of future results.

All the index performance results referred to are provided exclusively for comparison purposes only. It should not be assumed that they represent the performance of any particular investment.

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This document provides summary information regarding the Strategy. This document should be read in conjunction with the Strategy’s Disclosure Document, which is available from SSGA. The Strategy Disclosure Document contains important information about the Strategy, including a description of a number of risks.

More About Systematic Active Fixed Income (SAFI)

The data-driven insights in our Systematic Fixed Income strategies are informed by systematic signals delivered in the form of indices developed by the Barclays Quantitative Portfolio Strategy team, or QPS, which is well-recognized as an innovator in quantitative fixed income research. Their innovative signals and portfolio optimization methodologies form an important input to the process we, at State Street Global Advisors, use in the implementation and management of Systematic Active Fixed Income strategies.

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