How can smart beta methods be applied to credit?

Credit risk seems to have taken a back seat recently, with even Lufthansa's junk-rated bond being massively oversubscribed. Using a metric like the Moody's Analytics expected default frequency measure could help passive allocators manage credit risk, explains Ksenya Rulik at Ossiam.

Much has been written lately about investor appetite for yield in the low rate environment, and how it has boosted inflows in corporate credit, often regardless of the credit quality of the issues. The Lufthansa case A good example is the heavily oversubscribed Lufthansa bond issue in September, which raised €500mn despite a low yield of just 1.125%, recurring pilot strikes and the airline's ‘junk' rating from Moody's. In the search for yield, investors are mistakenly ignoring valuable indicators. The Lufthansa example is not an isolated case. Our research shows that broad corpora...