This question is aimed at all of your fixed income guys. So I'm going in for a second round research role (it's entry level) here soon, and the group that I'm interviewing with takes a relative value strategy for their investments. Now I'm familiar with this term when it comes to equities, but not so much fixed income. So is relative value in fixed income just speculating on market inefficiencies, and taking advantage of those inefficiencies i.e. buying bonds at a discount and waiting for the yield to readjust to make a profit? Also, any pointers on technicals I should know? I'm very familiar with investment grade fixed income (Institutional Investing) but not as familiar with riskier fixed income assets. Any help would be appreciated!
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Relative value means to look at one set of relationships vs. another set of relationships and finding discrepancies.
Here is a basic corporate bond example that is not reflective of the market, but used for illustrative purposes: Let's say Home Depot (HD), has a steeper credit curve than Lowe's (LOW), then you may be getting paid to extend maturity in HD, ie buy longer dated HD bonds, vs. LOW.
There are many relative value trading ideas, which could be based on: Cap structure: What does senior vs. subordinated debt look like in a name vs. other names Coupon: What's the spread between a high coupon bond and a current coupon bond? Deal Size: Is a bond index eligible? If so, what's the spread between an index eligible bond and a non-index eligible bond?
Generally, after looking at these relationships, some bonds may be either cheap or rich. RV trading in fixed income means to look at these relationships and buy the things that are at the cheap end of the relationship and sell things at the rich end of the relationship.
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