Coming Soon in Investment Grade Fixed Income: The Great Rebalancing

Investment grade assets represent by far the biggest component of institutional fixed income portfolios, making up 72% of fixed income assets for institutions in the study and almost a quarter of total AUM. Despite these sizable holdings, the institutions are significantly underweighted to investment grade, relative to target allocations.

As shown in Exhibit 4, current allocations lag targets by sizable margins in every investment grade category. The cause of this imbalance is no mystery—a prolonged period of stock market outperformance that has inflated the valuation of equity holdings. The effect is equally clear: This research suggests that investors will be putting assets to work in investment grade fixed income as they rebalance portfolios to bring investment grade allocations back in line with targets.