Return to Rolldown – what does a short dated crossover strategy look like in practice?

A short-dated 50/50 BBB-BB crossover strategy offers an attractive risk-adjusted alternative within fixed income by combining income and rolldown while limiting duration and deep-credit exposure.

• M&G back-tested the strategy using more than 20 years of index data, combining short-dated BBB and BB indices hedged back to GBP.
• The strategy targets the steepest part of the curve, where rolldown is strongest, and focuses on lower investment grade bonds and higher-quality high yield bonds.
• Its maximum drawdown was 17% during the global financial crisis, while drawdowns were comparatively lower than in other fixed-income asset classes outside 2008.
• Combining BBB and BB broadens diversification because short-dated investment grade is concentrated in financials, whereas high yield has greater exposure to utilities and telecommunications.
• The article argues that downgrade risk is limited over the longer term because fallen angels have historically outperformed both investment grade and high yield, despite possible short-term weakness after downgrades.

Takeaway: Investors seeking income should examine the short-dated BBB/BB crossover segment, but the backtest is historical and does not eliminate losses from severe credit-spread widening or future rate and credit shocks.