Fixed Income Factors II

Style versus traditional fixed income factors

September 2023. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • There are style factors like value and traditional fixed income factors like term premium
  • The correlations of these factors has been low
  • However, it is not clear which are better suited for a factor exposure analysis


In our last research article, we compared fixed income factors from two asset managers, namely AQR Capital Management and Robeco, which highlighted different security selection and portfolio construction processes. Although these two data sets included the same factors, eg value and momentum, these were completely uncorrelated, which raised the question of which data set is most suitable for running a factor exposure analysis on bond mutual funds (read Fixed Income Factors).

It is worth noting that these factors can be called style factors as they mimic how investors might select bonds, eg buying cheap, outperforming, or high-quality bonds. However, fixed income investors tend to use metrics like the term or credit spread when discussing bonds rather than highlighting a high exposure to the value factor.

In this research article, we will contrast style versus traditional fixed income factors.


The term premium refers to the excess yield that investors get paid for holding long versus short-term bonds, assuming the same issuer risk. There are plenty of choices for measuring the term premium, for example, the 10-year US Treasury minus the 2-year US Treasury or the ACM Term Premium from Adrian, Crump, and Moench, who all worked at the Federal Bank of New York.

Comparing the four term premium factors in the period from 1990 to 2023 highlights similar trends across time, where correlations ranged between 0.3 and 0.9. The premium was positive on average for all four variations with the Term Premium on a 10-Year Zero Coupon Bond exhibiting the lowest premium at 0.8% and the ACM Term Premium the highest premium at 1.2%.

Certain variations of the term premium factor are also called the yield curve, where some research indicates that a negative yield spread foreshadows a recession as investors become more risk-averse