Successful Factors to Select Outperforming Corporate Bonds

Abstract

This study presents a method to select corporate bonds that outperform the corporate bond market as a whole. The approach has many similarities to the well–investigated field of stock selection strategies. The literature suggests several variables that are successful for the selection of outperforming stocks. The filters the authors investigate to select outperforming bonds will be even more useful because the fixed–income universe is so much larger, with more than 10,000 issues available. The authors test equity–related and bond–specific variables for selecting outperforming corporate bonds. After testing all the individual variables, they combine the most promising variables into one strategy. They achieve better–than–average performance in a corporate bond portfolio if they select bonds with a high spread valuation, a low spread return in recent months, and positive equity earnings revisions. The promising results are robust to several sensitivity tests.