Adapting Active Fixed Income to a New Risk Regime

Systematic fixed-income beta has become a less reliable source of excess return, so active managers should shift toward diversified, idiosyncratic credit and security-selection decisions.

• The post-GFC regime rewarded systematic exposure through steep yield curves, stable rate volatility and tightening credit spreads, but flatter curves and more persistent two-sided volatility now reduce the carry and reliability of duration bets.
• Credit spreads remain narrow, credit curves are flatter, and the compensation for additional spread risk is below its historical average, making issuer selection, capital-structure positioning, relative value and sector selection more attractive than credit beta.
• In a 20-year study through July 2026, duration-neutral Core Plus funds had the highest information ratios, while more aggressive duration timing produced higher average excess returns but lower risk-adjusted efficiency.
• The same universe analysis found that moderate high-yield allocations improved efficiency, whereas credit timing showed no consistent advantage across activity levels; credit exposure added efficient return, but timing it generally did not.
• Stock-bond and credit-rate correlations were negative from 2000 through 2021 but became more neutral or positive from 2022 onward, weakening the traditional hedging role of Treasuries when inflation risk dominates.

Takeaway: Active fixed-income portfolios should use systematic exposures selectively, budget risk with restraint and emphasize broad, independent sources of alpha; PGIM’s MPC1 framework is intended to distinguish genuine selection skill from returns generated by simply owning the credit market.