Credit factor performance 2025: Carry dominated – but balance prevailed

Rally after a volatile start: Credit markets in 2025

2025 was a good year for investors in corporate bonds. An investment in euro-denominated corporate bonds yielded a return of approximately 3%, while euro investors in global corporate bonds were able to achieve as much as 4.75% after currency hedging.

Initially, it looked as if there would be a correction to the spread rally that had been ongoing for several quarters. The German government’s announcement of a massive fiscal package and US tariffs caused spreads to rise and investors to become nervous in March and April. However, this nervousness quickly subsided and, supported by rising corporate profits, led to a continuation of the rally, as illustrated in Figure 1.

2025 was a carry year – with limited support from other factors

How did systematic credit factors perform in such an environment? Figure 2 shows the performance of Quoniam’s systematic factors carry, momentum and value in 2025.

As can be seen in Figure 2 and as could be expected from Figure 1, 2025 was a carry year. The carry portfolio outperformed the market by just under 1% and benefited from the disproportionate spread tightening of the riskiest bonds.

In comparison, the carry-adjusted value and momentum portfolios showed only a marginal gain in 2025. The overall signal from the three individual signals achieved an outperformance of just over 50 basis points.

Historical comparison: Carry strong, multi-factor more efficient

Table 1 shows the annual performance of the three factors and the combined multi-factor signal per year over the last five calendar years:

As Table 1 illustrates, the carry factor was the best performing factor of the last five years which is not a surprise given the spread rally we experienced. Moreover, the returns for 2025 for all factors are below their five-year average. While carry is only slightly below average, the value factor was particularly weak in 2025.

If we compare the average factor return to the risk of the respective factor, we see that carry has the highest return, but in risk-adjusted terms, the factor lags significantly behind the combined overall signal. The average return of 1.08% was achieved with an average tracking error of 1.13%. The multi-factor signal, on the other hand, achieved a return of 0.78% with a tracking error of 0.33%.

What currently low spreads mean for factor strategies

While looking in the rear-view mirror helps to understand performance patterns and explain realised performance, the question remains as to what performance can be expected in 2026 from a factor perspective. Will carry remain the dominant factor? Or will a widening in spread levels, as in 2022, lead to stronger performance for the others?

For this reason, we look at the performance of the three factors in low, medium and high spread environments. To define these environments, we calculate the average spread level of the global credit index per year and define low (or high) spread periods as those in which the average spread level was below 100 (or above 150) basis points. Figure 3 shows the factor performance for each market environment.

Several points emerge from Figure 3. Firstly, all factors generate higher returns in a high spread environment than in a low spread environment. This is because, on average, cross-sectional volatility increases with spreads, offering investors more opportunities for bond selection. On the other hand, it can also be seen that carry is a particularly strong factor when spreads are high and therefore have high tightening potential. In periods of low spreads, the potential for widening limits returns. It can thus be seen that a balanced multi-factor signal in a low-spread environment not only delivers higher risk-adjusted, but also higher absolute returns than a carry factor.

Conclusion: Balance over single factors

Credit spreads are historically below average, creating an environment in which pure carry strategies need to be cautious. Strategies that use balanced signals, such as Quoniam’s multi-factor signal, are likely to fare well in such a market environment and deliver stable excess returns to investors. 2026 is a good time to learn more about these approaches.

Methodology: How we define carry, momentum and value

In our analysis, we use three factors: carry, momentum and value. These factors are briefly described below. For a detailed discussion of credit factors, we recommend our white paper series at the end of this section.

Carry

Carry captures the credit risk premium and is defined as the credit spread. For the purposes of this study, we sort companies according to their credit spread within different sector and maturity bands. The underlying assumption for this factor is that bonds that repay at maturity earn their spread. Therefore, bonds with a higher purchased spread are more attractive than bonds with a low spread.

Momentum

The momentum factor considers and combines equity momentum over several periods up to one year. For this factor, only bonds whose issuer owns a listed stock are used. The underlying assumption is that stocks react more quickly to corporate news than corporate bonds and that equity momentum therefore has predictive power for future bond movements.

Value

The value factor measures whether a bond is overvalued or undervalued relative to its risk. The credit spread of a bond is regressed on various risk characteristics such as balance sheet variables and equity information that reflect the risk of the bond. The residual, the unexplained part of the regression, is then the measure of the bond’s mispricing, called the value factor. The assumption behind value is that, over time, the market recognises the mispricing of the respective bond, and that undervalued bonds therefore have catch-up potential.

All factors are calculated for the bonds in the universe, which are then sorted according to their factor score. Each month, we select the top 20% of bonds for each factor and group them into an equally weighted portfolio, whose return we calculate and use as the factor return. There are no restrictions on the liquidity of the selected bonds or turnover in the portfolio. In this study, we neutralise momentum and value relative to carry, i.e. momentum and carry portfolios have no systematic carry loading. Their return thus reflects pure momentum and value returns.

Selected publications on credit factor investing:

Dr Harald Henke, Dr Hendrik Kaufmann, Dr Philip Messow und Dr Jieyan Fang-Klingler
Factor investing in credit
The Journal of Index Investing 11 (1), 2020
https://jii.pm-research.com/content/11/1/33

Dr Harald Henke und Dr Maximilian Stroh
Distinguishing factor strategies in corporate bonds and equities
https://www.quoniam.com/en/article/factor-strategies/

Dr Harald Henke
Diversifying credit portfolios with factor investing
https://www.quoniam.com/en/article/diversifying-credit-portfolios/

Dr Harald Henke, Max Geilen, and Tobias Stein
Incorporating pre-trade bond liquidity data into corporate bond management
https://www.quoniam.com/en/article/incorporating-pre-trade-bond-liquidity-data/

Dr Harald Henke, Maxim Popikov, Dr Maximilian Stroh, and Dr Desislava Rakova (published previously as Dr Desislava Vladimirova)
Quality as a factor in systematic corporate bond management
https://www.quoniam.com/en/article/quality-factor-investing-bonds/

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