Including Sectors as a Benchmark for Bond Performance

In the European credit market, challenges reach beyond simple credit risk evaluation. You must decide on an investment style, choose a benchmark, structure your portfolio, develop an analytical framework to forecast credit spreads, buy the securities - and keep an eye on what the various sectors are doing.

Recent studies that examined the relationship between sectors and credit ratings showed several interesting correlations:

Looking at companies within the same sector but with different credit ratings, the fact that a company was a telecom company was much more important than whether it was rated A or BBB.
Looking at companies in different sectors but with the same credit ratings, a company's rating did not have any strong relevance when comparing its performance. For example, comparing an A-rated car company and an A-rated telecom company, one business is cyclical and the other is not.
Credit ratings have changed in that five years ago, two-thirds of all BBB-rated bonds traded within a 20-basis point band. Today, that distribution is six times broader, making the rating agencies' designations less meaningful.
Bond prices are largely influenced by investor moods. Once burned by a bond in a specific sector, investors are apt to retreat from the entire sector.
It is getting more valuable to make the right sector call. Many experts recommend that you first determine your level of risk and then research the viability of using sector-rotation strategies, which involves varying the allocation or percentage weights of different sectors of bonds held within your portfolio.

SS&C's suite of products can help you manage your fixed income portfolio. Antares can handle your trade order management requirements including trade modeling. Compliance Monitor can establish your trading parameters, restrictions and thresholds. CAMRA can address your accounting, valuation and reporting requirements.

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