Advanced Credit Strategy Construction in Rising Interest Rate Environments

As a fixed-income portfolio manager at a large institutional investment firm, you have been tasked with developing a credit strategy for the firm's corporate bond portfolio. The focus of this strategy must be on both risk management and value creation in a rising interest rate environment.

Your firm currently allocates 70% of its fixed-income portfolio to government bonds and 30% to corporate bonds, with a historical average credit rating of BBB. Given the current economic outlook, including potential credit tightening and increased defaults in certain sectors, you need to assess which sectors of the corporate bond market present both the greatest risk and the potential for enhanced yield.

Discuss how you would approach constructing this credit strategy, considering both fundamental and technical factors in credit analysis. Include specific examples of sectors you would target or avoid, and justify your allocations based on credit spreads, rating changes, and macroeconomic indicators.

Additionally, explain how diversification and active management can enhance the portfolio's resilience against credit events, particularly in a volatile interest rate environment.