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Minicycles and liquidity as a fixed income alpha lever

By Joshua P. Marston, Robert M. Hall, and Benjamin T. Dyer

In brief

  • Shifts in market structure since the global financial crisis (GFC) have resulted in lasting changes in the
    behavior of credit spreads through a credit cycle with significant implications for active investors.
  • Liquidity in the credit markets has contracted dramatically post-GFC, contributing to increasingly
    frequent episodic periods of notable intracycle spread volatility (i.e., minicycles).
  • While increased volatility can be challenging, it also creates opportunities for active managers to add
    value through tactical asset allocation.
  • To capture alpha through these minicycles, valuation discipline is critical, as the risk of short-term give-ups
    in relative portfolio performance created by reducing credit exposure when spreads are tight is likely to be
    more than offset by the potential gains realized by being positioned to redeploy back into credit at more
    attractive valuation levels (i.e., positioned to be a provider of liquidity during periods of distress).

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