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Successful factors to select outperforming corporate bonds

Successful factors to select outperforming corporate bonds

15-11-2001 | Research

Can outperforming corporate bonds be selected systematically just the same way stocks can be? Our research shows it works.

  • Erik van Leeuwen
    Erik
    van Leeuwen
    Head of FI Business Development

Speed read

  • We present a method to select corporate bonds systematically
  • We combine the most promising variables into one strategy.
  • Results are robust to several sensitivity tests
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This study presents a method to select corporate bonds that outperform the corporate bond market as a whole. The approach has many similarities to the well-investigated field of stock selection strategies. The literature suggests several variables that are successful for the selection of outperforming stocks.

The filters we investigate to select outperforming bonds will be even more useful because the fixed-income universe is so much larger, with more than 10,000 issues available. We test equity-related and bond-specific variables for selecting outperforming corporate bonds. After testing all the individual variables, we combine the most promising variables into one strategy.

They achieve better-than-average performance in a corporate bond portfolio if they select bonds with a high spread valuation, a low spread return in recent months, and positive equity earnings revisions. The promising results are robust to several sensitivity tests.

1 Hottinga, J., Van Leeuwen, E. and Van Ijserloo, J., 2001, ‘Successful factors to select outperforming corporate bonds’, The Journal of Portfolio Management.

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