Net-Zero Glidepaths for Fixed-Income Portfolios

A bond portfolio generates cash flows over time that include coupon payments and the face value of matured bonds, assuming no defaults. With controlled and systematic reinvestment of this cash flow, investors can gradually mold and modify their fixed-income portfolios’ exposure to different risk factors, including credit-risk buckets; specific interest rates; or any issuer, sector or country risk. We propose that fixed-income investors can use this mechanism to design a flexible, smooth yet low-cost strategy - or a “glidepath” - to direct their portfolios toward their medium- and long-term objectives.

As an example, we show how different corporate bondholders can devise transition glidepaths, consistent with their security-selection process, to achieve their net-zero decarbonization targets - a case of long-term objectives. We present possible solutions - net-zero glidepaths (NZGps) - for two of the largest groups of corporate-bond investors: buy-and-hold investors and yield-seeking investors.

©2024 With Intelligence. Republished with permission from the Journal of Fixed Income, from: Afsaneh Mastouri and Juan Sampieri, “Net-Zero Glidepath for Fixed-Income Portfolios,” Journal of Fixed Income 34, no. 1 (summer 2024).