In fixed income investing, there are two conventional sources of return that investors are familiar with – collecting interest payments from bonds (i.e. income) and correctly predicting the direction of rates, which delivers capital gains or losses (i.e. duration exposure). The expected returns from both these sources are heavily challenged by the current low levels interest rates and credit spreads, as well as uncertainty about their future direction.
But what if there was another source of returns that could help restore balance to fixed income portfolios? At Ardea, we believe that source of return is relative value fixed income investing. Relative value strategies can deliver positive returns from fixed income, irrespective of the current level or future direction of rates and credit spreads
There is a lot more to fixed income than just buying bonds and relative value strategies can access this broader range of opportunities, which conventional approaches tend to miss. This is particularly compelling in the current environment, where conventional return sources are challenged and simply holding government bonds is no longer a reliably defensive strategy.