Advanced Credit Risk Management in Fixed-Income Portfolios

As a portfolio manager at a large investment firm, you have been tasked with analyzing the credit risk exposure associated with a client’s fixed-income portfolio, which comprises corporate bonds, municipal bonds, and sovereign debt from various emerging markets. The client has expressed concerns about potential default risk and its impact on the performance of the portfolio due to rising interest rates and global economic uncertainties.

In your response, discuss the following:

1. Identify and explain the major factors contributing to credit risk in the context of this fixed-income portfolio.
2. Evaluate the tools and strategies available for measuring and managing credit risk for each type of bond within the portfolio.
3. Consider the implications of rising interest rates on credit spreads and provide recommendations on how to mitigate these risks without sacrificing returns.

Provide examples to illustrate your points, and ensure your response reflects a comprehensive understanding of credit risk management within a portfolio management context.