July 17, 2017

After a three-decade bull market in bonds, changes in U.S. interest rates going forward will likely be more symmetrical. With the Federal Reserve in the midst of a rate hiking cycle, some fixed income investors may now be looking for strategies that can provide higher yields than cash and also guard against a rise in rates. One alternative, an ‘absolute return’ fixed income strategy, may meet both of these objectives.
In The Return of Absolute Return Fixed Income, PGIM Fixed Income Senior Investment Officer Michael Collins discusses different types of absolute return fixed income portfolios and how a well-diversified, duration-constrained portfolio can take advantage of alpha-generating opportunities while avoiding systematic exposure to rising interest rates.

Absolute return fixed income strategies go by a number of different names: absolute return, unconstrained, real return, strategic alpha, opportunistic, strategic income, non-traditional, and even ‘go-anywhere’ or ‘GA’ fixed income. Regardless of the name, these strategies generally share two common traits:

  • They strive to deliver positive absolute returns over a specified period regardless of the direction of interest rates.
  • Unlike traditional fixed income strategies, they are not typically managed against a market-capitalization weighted bond index. Rather, they are often managed against a cash-based benchmark such as 3-month LIBOR, 3-month Treasury bill, or any country’s money market (‘risk-free’) rate.

The defining feature of these types of strategies is that they are opportunistic. In most cases, they can select from a broad array of security types and ‘go-anywhere’ within the fixed income market in search of attractive returns.

Read The Return of Absolute Return Fixed Income.  Want to talk to Mike Collins? Contact Claire Currie.