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 following Q&A, Michael Collins, Senior Investment Officer, PGIM Fixed Income, 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.
What is an absolute return fixed income strategy?
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, and
- 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.
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