Market Insights

Market inefficiency is a growing opportunity in fixed income

In a theoretically efficient fixed income market, closely related bonds (or derivatives) with similar risk characteristics would always be priced consistently. In reality, these prices persistently diverge from each other, which means fixed income markets are inefficient.

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Are illiquid bonds the ‘WeWork’ of the fixed income world?

Liquid securities are those that can be readily bought or sold in sufficient volumes, at reliably transparent prices, without incurring punitive transaction costs. Illiquid securities are those that fail to meet these criteria to varying degrees. Liquidity is a spectrum rather than a binary concept.

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The vanishing yield cushion

Conventional approaches to fixed income investing rely on bond yields to generate returns. Most of the returns come from accumulating portfolios of bonds to harvest yield.

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The asymmetry of interest rate duration risk

A common way to think about bond yields is to view them as a cushion that protects bondholders from the potential negative effects of duration risk. As bond yields have now collapsed to very low levels, that protection from duration risk has vanished.

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Mrs. Watanabe meets European insurance companies

Since the early 2000’s the name ‘Mrs. Watanabe’ has been used to describe yield seeking Japanese retail investors, who were forced to increase their offshore investment risk taking in response to ultra-low interest rates back home.

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