Fixed and credit carry ARP have performed well in 2019 given curve moves

Fixed income rates carry and credit carry alternative risk premia strategies have done well for most of this year. These simple strategies have performed better than many well established equity risk premia. The carry strategy in fixed income attempts to take advantage of the higher yields associated with long-term bonds. A positive term premia, which is often constructed as duration neutral, will do well in stable and declining spread environments. The credit carry strategy usually takes advantage of high yield versus investment grade spread differentials.  

The reason for the fixed income carry gains has been the sharp decline in the yield curve during the summer. While curve flattening has been in place for years, the strong decline based on Fed rate cut expectations was especially profitable. However, there has been a giveback in return since the steepening of the yield curve.

The credit carry trade did especially well in the first two months of the year as high yield spreads compressed. The rest of the year has been mixed. The premia differential has stayed relatively stable but has seen more with greater changes in high yield spreads.

Given the Fed may be on hold in December, the fixed income carry trade may not see the same upside as earlier in 2019. ff equity markets remain stable, we expect the credit carry trade to be positive but more stable relative to behavior earlier this year.