Fixed income investments
i'm currently working in a role where i focus on fundamental credit research (provide coverage on issuers and assign internal ratings) at a financial institution. However, my role lacks any focus on the value of the debt securities and whether these securities would be a good investment.
I like my job, but i would like to move to fixed income research at a buyside firm and was hoping that someone can share a little on their investment thesis for bonds. For instance, why is a particular bond perceived to be undervalued and will make a great investment?
Would be awesome to get some recommendations on resources to understand more about fixed income investing as well!
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If you are working at a long-only bond shop, whether investment grade or high yield, the end game is be beating the index by overweighting/underweighting names. So, you want to find bonds that are undervalued (and will outperform) to the index to and sell names that are overvalued (and will underperform). If you are looking at an investment grade bond, it might go like this: "This BBB- rated name trades at +200 basis points over Treasuries which is wide relative to the index at +150. I think it is an above-average quality credit and will get upgraded to BBB+ in the next 18 months as its pays down debt. If this happens, the bonds could tighten to +130 over."
That goes off of spread to Treasuries but you could replace that with yields or bond prices (more common in high yield). Bond math for the above:
10yr Treasury yield = 0.75% +200bp spread = 2.75% yield on a 10yr corporate bond. If we assume it has 5 years of duration and the spread tightens to +130bps, that implies 70 basis points of tightening, which multiples by 5yrs of duration = 3.5% capital appreciation on the bonds.
very helpful! thank you
Let me know if you have other questions
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As sarcastic as this may seem, I think it was an important thing I learned in my first week as an analyst. Can the company pay back our money?! The rest follows.
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