Trading Credit Events in Corporate Bond Markets

Fixed income investors are facing challenges due to the inflation shock and rising interest rates. As central banks wind down their asset purchasing programs and economic growth slows, bond selection has become crucial for navigating rate volatility and allocating capital to the right securities.

In our latest paper, we evaluate the impact of credit-related announcements on corporate bond prices, conditioning news on past bond performance and news sentiment. We find:

• A “surprise” effect: Conditioning credit ratings, equity actions, and stock prices on good news and poor past performance generates significant positive abnormal bond returns. Conditioning credit ratings, analyst ratings, and price targets on bad news and good past performance generates long-lasting outperformance.
• A “buy the rumor, sell the news” effect: Conditioning credit ratings, equity actions, analyst ratings, price targets, and stock prices on good news and good past performance generates negative abnormal bond returns.
• A combined strategy outperforms: A strategy excluding good announcements associated with good past performance while targeting unexpected events outperforms the unconditional strategy and individual strategies. The combined strategy generates annualized returns of 200 bps above the annual credit benchmark at a two-day effective holding period, and 90 bps at the one-week holding period, compared to 50 bps for the unconditional strategy.

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