----------- In particular, seasonality deserves comment. The annual rotation toward risk aversion in the bond market during the second half of most years contributes to a “fourth-quarter effect”—that is, there is underperformance of lower-rated credits, B’s in high-yield and Baa’s in investment-grade, compared to higher-rated credits. A fresh spurt of market optimism greets nearly every New Year. Lower-rated credit outperforms higher-quality credit—this is referred to as the “first- quarter effect.”
This pattern suggests a very simple and popular portfolio strategy: underweight low-quality credits and possibly even credit products altogether until the mid-third quarter of each year and then move to overweight lower-quality credits and all credit product in the fourth quarter of each year.----------
Shouldnt the strategy be in reverse. Since lower rated credits are underperforming at the end of year they should be underweights it ??
I’m guessing what this means is that during Q4, as the credits underperform, you start to switch your portfolio to overweight those, so that in next Q1 you can enjoy the performance.
This is a contrarian strategy . Since the cycle starts with underperformance of Lower-Quality credit in Q4 followed by outperformance of Lower-Quality credit in Q1 , a profitable strategy might be to supply liquidity by buying lower-quality in Q4 and take profits in Q1 .