Credit Strategy Adjustment in Fixed Income Portfolios

A fixed income portfolio manager is tasked with optimizing the portfolio’s credit exposure within a largely investment-grade universe, while also considering macroeconomic indicators that could affect credit spreads and default probabilities. The portfolio currently holds a mix of corporate bonds, mortgage-backed securities, and government bonds.

Recently, the team has identified a trend of widening credit spreads and increasing default probabilities in specific sectors, particularly retail and energy. Given this context, describe a comprehensive credit strategy the portfolio manager should undertake to address the increasing risks while also positioning the portfolio for potential opportunities in undervalued credit securities. Include an analysis of the tools and metrics that will guide the manager’s decisions, as well as any potential risks associated with the suggested strategy.