Bonds

Bonds have two price components, yield and response of price to prevailing interest rates. How much of a return premium should investors in bonds expect? How can investors enhance this premium? These blog entries examine investing in bonds.

Page 1 of 41234

New Active Bond ETF Skims the Cream?

Do new funds have the latitude to concentrate in the best opportunities while they remain small? In his June 2014 presentation package entitled “How Long Might An Active Bond ETF’s ‘Best Ideas’ Outperformance Window Last?”, Claude Erb compares the performance of the PIMCO Total Return ETF (BOND), an exchange-traded fund (ETF) introduced in March 2012, to that of its parent mutual fund PIMCO Total Return Institutional Class (PTTRX). Using monthly total returns for BOND and PTTRX during March 2012 through May 2014, he finds that: Keep Reading

Long-term Equity Risk Premium Erosion?

Does the reward for taking the risk of holding stocks exhibit any long-term trend? In his April 2014 presentation package entitled “The Incredible Shrinking ‘Realized’ Equity Risk Premium”, Claude Erb examines the trend in the realized U.S. equity risk premium (ERP) since 1925. He defines this ERP as the retrospective difference in 10-year yield between the broad U.S. stock market and the 10-year yield on safe assets such as U.S. Treasury bills or intermediate-term U.S. Treasury notes. Using 10-year returns for U.S. stocks and various alternative safe assets (bills, notes and bonds) during 1925 through 2013, he finds that: Keep Reading

Net Performance of SMA and Intrinsic Momentum Timing Strategies

Does stock market timing based on simple moving average (SMA) and time-series (intrinsic or absolute) momentum strategies really work? In the November 2013 version of his paper entitled “The Real-Life Performance of Market Timing with Moving Average and Time-Series Momentum Rules”, Valeriy Zakamulin tests realistic long-only implementations of these strategies with estimated trading frictions. The SMA strategy enters (exits) an index when its unadjusted monthly close is above (below) the average over the last 2 to 24 months. The intrinsic momentum strategy enters (exits) an index when its unadjusted return over the last 2 to 24 months is positive (negative). Unadjusted means excluding dividends. He applies the strategies separately to four indexes: the S&P Composite Index, the Dow Jones Industrial Average, long-term U.S. government bonds and intermediate-term U.S. government bonds. When not in an index, both strategies earn the U.S. Treasury bill (T-bill) yield. He considers two test methodologies: (1) straightforward inception-to-date in-sample rule optimization followed by out-of-sample performance measurement, with various break points between in-sample and out-of-sample subperiods; and, (2) average performance across two sets of bootstrap simulations that preserve relevant statistical features of historical data (including serial return correlation for one set)He focuses on Sharpe ratio (including dividends) as the critical performance metric, but also considers terminal value of an initial investment. He assumes the investor is an institutional paying negligible broker fees and trading in small orders that do not move prices, such that one-way trading friction is the average bid-ask half-spread. He ignores tax impacts of trading. With these assumptions, he estimates a constant one-way trading friction of 0.5% (0.1%) for stock (bond) indexes. Using monthly closes and dividends/coupons for the four specified indexes and contemporaneous T-bill yields during January 1926 through December 2012 (87 years), he finds that: Keep Reading

Best Bear Market Asset Class?

A subscriber asked which asset (short stocks, cash, bonds by subclass) is best to hold during equity bear markets, defined simply as intervals when SPDR S&P 500 (SPY) is below its 10-month simple moving average (SMA10). To investigate, we test the following eight alternatives, five of which are bond-like mutual funds and one of which is a gold stocks/gold mutual fund:

Short SPY
Cash, with return estimated as the yield on 13-week U.S. Treasury bills (T-bill)
Vanguard GNMA Securities (VFIIX)
T. Rowe Price International Bonds (RPIBX)
Vanguard Long-Term Treasury Bonds (VUSTX)
Fidelity Convertible Securities (FCVSX)
T. Rowe Price High-Yield Bonds (PRHYX)
Fidelity Select Gold Portfolio (FSAGX)

Specifically, we compare monthly return statistics, cumulative performances and maximum drawdowns of these eight alternatives for months during which SPY is below its SMA10. Using monthly T-bill yield and monthly dividend-adjusted closing prices for the funds above during January 1993 (as limited by SPY) through February 2014, we find that: Keep Reading

Simple Debt Class Mutual Fund Momentum Strategy

A subscriber requested confirmation of the performance of a simple momentum strategy that each month selects the best performing debt mutual fund based on total return over the past three months. To investigate, we test a simple strategy on the following eight mutual funds (those with the longest histories from a proposed list of 14 funds):

T. Rowe Price Tax-Free High Yield Bonds (PRFHX)
T. Rowe Price New Income (PRCIX)
Vanguard GNMA Securities (VFIIX)
T. Rowe Price International Bonds (RPIBX)
Vanguard Long-Term Treasury Bonds (VUSTX)
Fidelity Convertible Securities (FCVSX)
T. Rowe Price High-Yield Bonds (PRHYX)
Fidelity New Markets Income (FNMIX)

As proposed, we allocate all funds at the end of each month to the fund with the highest total return over the past three months (3-1). We determine the first winner in January 1995 to accommodate momentum measurement interval sensitivity testing. Using monthly dividend-adjusted closing prices for the eight funds during January 1994 (as limited by FNMIX) through February 2014 (242 months), we find that: Keep Reading

Predicting Government Bond Term Premiums with Leading Economic Indicators

Do economic indicators usefully predict government bond returns? In the January 2014 version of their paper entitled “What Drives the International Bond Risk Premia?”, Guofu Zhou and Xiaoneng Zhu examine whether OECD-issued leading economic indicators predict government bond returns at a one-month horizon. They focus on a four-country (U.S., UK, Japan and Germany) aggregate leading economic indicator (LEI4). They test whether LEI4 outperforms historical averages and individual country LEIs in predicting term premiums (relative to a one-year bond) for U.S., UK, Japanese and German government bonds with terms of two, three, four and five years. Their test methodology employs monthly inception-to-date regressions of annual change in LEI4 versus next-month bond return for an out-of-sample test period of 1990 through 2011. Using end-of-month total return data for 1-year, 2-year, 3-year, 4-year and 5-year government bonds since 1962 for the U.S., 1970 for the UK, 1980 for Japan and 1975 for GM, all through 2011, they find that: Keep Reading

Bonds During the Off Season?

As implied in “Mirror Image Seasonality for Stocks and Treasuries?”, have bonds recently been better than stocks during the “Sell-in-May” months of June through October? Are the behaviors of government and corporate bonds over this interval similar? Using dividend-adjusted monthly prices for the PIMCO Long-Term US Government A (PFGAX), PIMCO High Yield A (PHDAX) and for SPDR S&P 500 (SPY) during November 1998 (the earliest available for PFGAX) through October 2013, we find that: Keep Reading

Low-risk Bonds Are Best (in the Future)?

Do low-risk bonds, like low-risk stocks, tend to outperform their high-risk counterparts? In their September 2013 paper entitled “Low-Risk Anomalies in Global Fixed Income: Evidence from Major Broad Markets”, Raul Leote de Carvalho, Patrick Dugnolle, Xiao Lu and Pierre Moulin investigate whether low-risk beats high-risk for different measures of risk and different bond segments. They consider only measures of risk that account for the fact that the risk of a bond inherently decreases as it approaches maturity, emphasizing duration-times-yield (yield elasticity). They focus on corporate investment grade bonds denominated in dollars, euros, pounds or yen, but also consider government and high-yield corporate bonds worldwide. Each month, they rank a selected category of bonds by risk into fifths (quintile portfolios). For calculation of monthly quintile returns, they weight individual bond returns by market capitalization. They reinvest coupons the end of the month. They focus on quintile portfolio Sharpe ratios to test the risk-performance relationship. Using monthly risk data and returns for 85,442 individual bonds during January 1997 through December 2012 (192 months), they find that: Keep Reading

Safe Retirement Portfolio Withdrawal Rate as of April 2013

What initial retirement portfolio withdrawal rate is sustainable over long horizons when, as currently, bond yields are well below and stock market valuations well above historical averages? In their June 2013 paper entitled “Asset Valuations and Safe Portfolio Withdrawal Rates”, David Blanchett, Michael Finke and Wade Pfau apply predictions of bond yields and stock market returns to estimate whether various initial withdrawal rates succeed over different retirement periods. They define initial withdrawal rate as a percentage of portfolio balance at retirement, escalated by inflation each year thereafter. They simulate future bond yield as a linear function of current bond yield with noise, assuming a long-term average of 5% and bounds of 1% and 10%. They simulate future U.S. stock mark return as a linear function of Cyclically Adjusted Price-to-Earnings ratio (CAPE, or P/E10), the ratio of current stock market level to average earnings over the last ten years, assuming P/E10 has a long-term average of 16.4 with noise (implying average annual return 10% with standard deviation 20%). They simulate inflation as a function of bond yield, change in bond yield, P/E10 and change in P/E10 with noise. They assume an annual portfolio management fee of 0.5%. They run 10,000 Monte Carlo simulations for each of many initial withdrawal rate scenarios, with probability of success defined as the percentage of runs not exhausting the portfolio before the end of a specified retirement period. Using initial conditions of a government bond yield of 2% and a P/E10 of 22 as of mid-April 2013, they find that: Keep Reading

POMO and T-note Yield

The Federal Reserve states that open market operations regulate “the aggregate level of balances available in the banking system,” thereby keeping the effective Federal Funds Rate close to a target level. The operations are predominantly repurchases, whereby the Federal Reserve provides liquidity. Do Permanent Open Market Operations (POMO) systematically affect the nominal or real yields on 10-year Treasury notes (T-notes)? Using monthly amounts of Treasuries repurchases via POMO during August 2005 through May 2013 (94 months) and contemporaneous monthly T-note yields and 12-month trailing inflation rates, we find that: Keep Reading

Page 1 of 41234
Avoiding Investment Strategy Flame-outs eBook
Login
Current Momentum Winners

ETF Momentum Signal
for July 2014 (Final)

Momentum ETF Winner

Second Place ETF

Third Place ETF

Gross Momentum Portfolio Gains
(Since August 2006)
Top 1 ETF Top 2 ETFs
209% 217%
Top 3 ETFs SPY
211% 77%
Strategy Overview
Recent Research
Popular Posts
Popular Subscriber-Only Posts