Fixed Income

Adapting Active Fixed Income to a New Risk Regime

October 5, 2026

A row of glass dominoes transitioning from falling to standing, representing adaptation to a changing risk regime

The drivers of excess return in fixed income have shifted from systematic risk premia to idiosyncratic selection. Has your manager?

<p>The drivers of excess return in fixed income have shifted from systematic risk premia to idiosyncratic selection. Has your manager?</p>

The post-GFC period was an unusually favorable environment for owning systematic fixed income risk, i.e., interest rates and credit. The emerging regime appears materially different. We believe this regime may favor a more selective approach to active management.

The yield curve is flatter than it was for most of the post-GFC period, so the carry embedded in duration positioning is less. Meanwhile, rate volatility has become more persistent and two-sided, widening the distribution of outcomes around any directional rate view. On the credit side, spreads have remained stubbornly narrow in the current regime, leaving less room for further compression and creating the potential for more asymmetric outcomes. Further, spread curves have trended flatter, offering less compensation for longer spread risk and less opportunity for carry and roll strategies.

 

PGIM’s Core Plus Strategy limited its systematic risk in the new market regime

Evolution of risk over time in historical representative portfolio (spread, duration, and yield curve)

Line chart showing spread, duration, and yield curve risk from 2006 through June 2026 for a historical representative Core Plus Fixed Income portfolio
zoom_in
Source: PGIM. As of June 30, 2026. The above table compares characteristics of the representative portfolio within the Core Plus Fixed Income Composite relative to its benchmark. These risk characteristics are not past or projected performance of the strategy. This information is used to describe our investment/risk management processes across all multi-sector market strategies managed by the investment team and may not be the representative portfolio of the strategy currently under consideration. This information is provided for illustrative purposes only, is subject to change, and should not be deemed representative of future characteristics for any multi-sector strategy. Actual results may vary for each client due to specific client guidelines and other factors. Spread, Duration and Yield Curve: Represents the principal component risk of tracking error.
close
Line chart showing spread, duration, and yield curve risk from 2006 through June 2026 for a historical representative Core Plus Fixed Income portfolio
Source: PGIM. As of June 30, 2026. The above table compares characteristics of the representative portfolio within the Core Plus Fixed Income Composite relative to its benchmark. These risk characteristics are not past or projected performance of the strategy. This information is used to describe our investment/risk management processes across all multi-sector market strategies managed by the investment team and may not be the representative portfolio of the strategy currently under consideration. This information is provided for illustrative purposes only, is subject to change, and should not be deemed representative of future characteristics for any multi-sector strategy. Actual results may vary for each client due to specific client guidelines and other factors. Spread, Duration and Yield Curve: Represents the principal component risk of tracking error.

Portfolio Implications

An overweight to rates and credit beta was justified in the post-GFC environment and may someday be again. But today, that environment has changed, and the balance of active risk should change with it. We believe this market regime is one where systematic risk should be employed selectively and tactically, with the bulk of excess return sourced from sector rotation and idiosyncratic security selection. In practice, we believe this argues for:

  • Selective systematic exposure
  • Breadth over concentration
  • Disciplined risk budgeting
  • Beta-aware measurement

Read the full report for our analysis of how active fixed income can adapt as the credit landscape evolves.

All investments involve risk, including possible loss of principal. Fixed income investments are subject to interest-rate, credit, market, liquidity and issuer risks. Active management, diversification and risk-management techniques do not assure a profit or protect against loss.

Any forward-looking statements, including projections or forecasts, are subject to change without notice and are not guarantees of future results.

5986219_PGIM

Thank you for your interest in PGIM Fixed Income.

Let us help you navigate today's complex market environment.