Credit Market Volatility and Change

Abstract

In recent years, corporate bond quality has deteriorated at the same time that the weight of these bonds in many fixed-income benchmarks has grown. As a result, these benchmarks have become riskier. One approach that investors can take to moderate this risk, and to increase liquidity, is to move toward better-diversified benchmarks, such as (for intermediate-term bond portfolios) the Lehman Intermediate Aggregate instead of the more traditional Government/Credit. Investors who need to trade quickly, such as tactical asset allocators, may need even more liquidity and would benefit from a Government-only benchmark. Active managers could then add value by making off-benchmark bets, but would not be required by the composition of the benchmark to hold illiquid or risky issues.