Factor Exposure Analysis 119: Fixed Income Factors III

What is driving bond funds?

June 2026. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

  • There are different approaches to fixed income factor exposure analysis
  • None of these seems statistically superior in explaining bond returns
  • However, some are more intuitive than others

INTRODUCTION

We published our initial research on factor exposure analysis of fixed income ETFs in 2022, followed by two further articles in 2023, in which we highlighted a persistent divide in how practitioners approach the subject. The fixed income perspective tends to use the language of bond markets – analyzing funds through the lens of duration, yield, and credit quality. The quantitative perspective borrows from the equity factor toolkit, applying concepts such as value, quality, momentum, and low volatility to fixed income portfolios (read Factor Exposure Analysis 108: Fixed Income Factors II and Factor Exposure Analysis 107: Fixed Income Factors).

Our earlier research showed that neither approach was clearly superior in explaining the drivers of risk and return in bond funds – each captures something the other misses. In this article, we make another attempt at building a more intuitive and comprehensive framework for fixed income factor exposure analysis.

FIXED INCOME FACTORS

Investors seeking higher returns than short-term government bonds offer have essentially two choices: lend money to the government for longer periods or lend to riskier borrowers, such as corporates or foreign governments. The first source of additional return is measured by the duration of a bond – expressed in years – and the second by the credit spread. We use base interest rates, duration, and credit spreads as our core fixed income factors, but extend them with spreads on inflation via Treasury Inflation-Protected Securities (TIPS), mortgage-backed securities (MBS), and emerging markets (EM).

The duration factor is defined as the difference in total returns between long and short-term government bonds. All other factors are defined as the difference in total returns