Marketweight: What It Means, How It Works

What is Marketweight?

Marketweight refers to the value rating given to a fixed-income instrument if it's credit spread is aligned with market expectations.

Understanding Marketweight

The marketweight ranking system gives a subjective estimate of the accuracy of a fixed-income instrument's current credit spread which can then be used by an investor to determine whether that instrument is an attractive investment. The system includes three ranks - marketweight, overweight and underweight. The marketweight rating indicates that the current credit spread of an instrument is in line with market expectations. Essentially, a fixed-income security deemed to be marketweight is said to offer a credit spread that's at or near the market's consensus.

Just as stocks may have a buy, sell or hold recommendation, this credit rating system will rate a debt instrument as overweight, underweight or marketweight. Being marketweight is similar to having a hold rating, whereas being overweight or underweight is equivalent to the buy and sell titles, respectively. Analysts will determine whether the current credit spread is an appropriate measure of risk for the investment and place a recommendation accordingly.

Just as equity securities, fixed-income instruments are separated by several categories. These factors include, among others, credit risk (or credit rating), geography, industry, yield, and maturity. Fixed-income securities add another layer of consideration for contingencies, such as call-options and convertibility, that could further impact portfolio weighting decisions.

Fixed-income instruments such as investment-grade bonds might be described as being held at marketweight, meaning a portfolio is neither overweight nor underweight (allocated to) investment-grade bonds relative to a common benchmark. When a portfolio manager has a particular view, such as a bullish stance on bonds from the industrials sector, a portfolio can be slanted from the market's consensus by overweighting the portfolio to an overweight position in industrials bonds.