Samuel Manser, you have investigated the effect of factors on the return of corporate bonds traded in Swiss francs. Your analysis (paywall) was recently published in the scientific journal Financial Markets and Portfolio Management. Why did you take a close look at this particular bond segment?
The market for corporate bonds in Swiss francs combines a broad debtor universe with an excellent data situation. Nevertheless, research into return factors mainly deals with bonds in US dollars. The motivation behind the investigation was to focus on the Swiss market as well as apply and review the previous findings for the first time. The insights gained also make our investment processes even more effective.
«Carry», «value», «equity momentum spillover» and «defensive» are the four factors you analysed. Let's first look at the «carry» factor.
The carry is a significant part of why returns from bonds differ. As a rule, the higher the carry is, the higher the returns and the higher the risk. The latter is reflected in high volatility, which is why the carry is not a reliable signal for higher returns. Historically, however, the carry was a more reliable signal in the domestic debtor segment than in the foreign segment. One reason for this is that significantly more borrowers from the foreign segment fell into the high-yield range due to credit rating downgrades. Despite a high carry, these debtors suffered noticeable price corrections.
In other words, you can't rely on the carry factor. What about the «value» factor?
Value also uses the carry, but compares it with fundamental credit risk. This can be quantified, for example, based on the credit rating or an estimated probability of default. For instance, a borrower valued favourably may offer a high carry within its rating peer group or in terms of its probability of default. A high carry relative to fundamental credit risk corresponds to a favourable valuation and promises higher returns. My analysis shows that a consistent value characteristic is also a reliable signal for future returns for CHF bonds.