Bonds

What happens if we extend the “Simple Asset Class ETF Value Strategy” (SACEVS) with a utilities risk premium, derived from the yield on Utilities Select Sector SPDR Fund (XLU)? To investigate, we apply the SACEVS methodology to the following asset class exchange-traded funds (ETF), plus cash:

3-month Treasury bills (Cash)
iShares 20+ Year Treasury Bond ETF (TLT)
iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)
XLU
SPDR S&P 500 ETF Trust (SPY)

This set of ETFs relates to four risk premiums, as specified below: (1) term; (2) credit (default); (3) utilities; and, (4) equity. We focus on effects of adding the utilities risk premium on gross compound annual growth rates (CAGR), maximum drawdowns (MaxDD) and annual Sharpe ratios of the Best Value (picking the most undervalued premium) and Weighted (weighting all undervalued premiums according to degree of undervaluation) versions of SACEVS. Using lagged quarterly S&P 500 earnings, monthly S&P 500 Index levels and monthly yields for 3-month U.S. Treasury bill (T-bill), the 10-year Constant Maturity U.S. Treasury note (T-note), Moody’s Seasoned Baa Corporate Bonds since March 1989 (limited by availability of earnings data), XLU prices and dividends since December 1998 (inception) and monthly dividend-adjusted closing prices for the above asset class ETFs since July 2002, all through May 2024, we find that: Keep Reading

“Countercyclical Asset Allocation Strategy” summarizes research on a simple countercyclical asset allocation strategy that systematically raises (lowers) the allocation to an asset class when its current aggregate allocation is relatively low (high). The underlying research is not specific on calculating portfolio allocations and returns. To corroborate findings, we use annual mutual fund and exchange-traded fund (ETF) allocations to stocks and bonds worldwide from the 2024 Investment Company Fact Book data tables to determine annual countercyclical allocations for stocks and bonds (ignoring allocations to money market funds). Specifically:

• If actual aggregate mutual fund/ETF allocation to stocks in a given year is above (below) 60%, we set next-year portfolio allocation below (above) 60% by the same percentage.
• If actual aggregate mutual fund/ETF allocation to bonds in a given year is above (below) 40%, we set next-year portfolio allocation below (above) 40% by the same percentage.

We then apply next-year allocations to stock (Fidelity Fund, FFIDX) and bond (Fidelity Investment Grade Bond Fund, FBNDX) mutual funds that have long histories. Based on Fact Book annual publication dates, we rebalance at the end of April each year. Using the specified actual fund allocations for 1984 through 2023 and FFIDX and FBNDX May through April total returns and end-of-April 1-year U.S. Treasury note (T-note) yields for 1985 through 2024, we find that: Keep Reading

What happens if we extend the “Simple Asset Class ETF Value Strategy” (SACEVS) with a real estate risk premium, derived from the yield on equity Real Estate Investment Trusts (REIT), represented by the FTSE NAREIT Equity REITs Index? To investigate, we apply the SACEVS methodology to the following asset class exchange-traded funds (ETF), plus cash:

3-month Treasury bills (Cash)
iShares 20+ Year Treasury Bond (TLT)
iShares iBoxx $ Investment Grade Corporate Bond (LQD)
SPDR Dow Jones REIT (RWR) through September 2004 dovetailed with Vanguard REIT ETF (VNQ) thereafter
SPDR S&P 500 (SPY)

This set of ETFs relates to four risk premiums, as specified below: (1) term; (2) credit (default); (3) real estate; and, (4) equity. We focus on effects of adding the real estate risk premium on gross compound annual growth rates (CAGR), maximum drawdowns (MaxDD) and annual Sharpe ratios of the Best Value (picking the most undervalued premium) and Weighted (weighting all undervalued premiums according to degree of undervaluation) versions of SACEVS. Using lagged quarterly S&P 500 earnings, monthly S&P 500 Index levels and monthly yields for 3-month U.S. Treasury bill (T-bill), the 10-year Constant Maturity U.S. Treasury note (T-note), Moody’s Seasoned Baa Corporate Bonds and FTSE NAREIT Equity REITs Index since March 1989 (limited by availability of earnings data), and monthly dividend-adjusted closing prices for the above asset class ETFs since July 2002, all through May 2024, we find that: Keep Reading

A subscriber requested validation 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 14 mutual funds, most of which have long histories:

T. Rowe Price New Income (PRCIX)
Thrivent Income A (LUBIX)
Vanguard GNMA Securities (VFIIX)
T. Rowe Price High-Yield Bonds (PRHYX)
T. Rowe Price Tax-Free High Yield Bonds (PRFHX)
Vanguard Long-Term Treasury Bonds (VUSTX)
T. Rowe Price International Bonds (RPIBX)
Fidelity Convertible Securities (FCVSX)
PIMCO Short-Term A (PSHAX)
Fidelity New Markets Income (FNMIX)
Eaton Vance Government Obligations C (ECGOX)
Franklin Floating Rate Daily Access A (FAFRX)
Vanguard Total Bond Market Index Adm (VBTLX)
Principal Spectrum Pref&Cptl Scs IncA (PPSAX)

We consider a strategy that allocates funds at the end of each month based on total returns over a specified ranking (lookback) interval to the Top 1, equal-weighted (EW) Top 2, EW Top 3, EW Top 4 or EW Top 5 funds. We determine the first winners in November 1988 so that at least nine funds are available for lookback interval sensitivity testing. As a benchmark, we use the equal-weighted and monthly rebalanced combination of all available funds (EW All). Using monthly dividend-adjusted closing prices for the 14 mutual funds from inceptions through April 2024, we find that: Keep Reading

How should investors think about the correlation between stock market returns and bond market returns when constructing a diversified portfolio? In their April 2024 paper entitled “Stock-Bond Correlation: Theory & Empirical Results”, Lorenzo Portelli and Thierry Roncalli examine theoretical and empirical relationships between the stocks-bonds return correlation and other variables/conditions. They focus on:

• Monthly returns of long-term government bonds and country stock markets (for example 10-year U.S. Treasury notes and the S&P 500 Index for the U.S.), but consider other choices for bond duration and stock portfolio.
• 48-month rolling returns when assessing correlation dynamics.

Using government bond and country stock market returns for the U.S. during 1965 through 2023 and for other developed, developing and emerging markets across Europe, the Americas and Asian as available through 2023, they find that:

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After seeing “Review of the Quantified Market Psychology Strategy”, reader Steve Ruoff requested review of his U.S. Treasuries timing strategy as recorded at Timertrac (Duration Strategy), which approximately every four weeks generates allocations to: Direxion Daily 7-10 Year Treasury Bull 3X Shares (TYD); Direxion Daily 7-10 Year Treasury Bear 3X Shares (TYO); and cash, for which we use SPDR Bloomberg 1-3 Month T-Bill ETF (BIL). Strategy inputs encompass:

1. Current economic activity, inflation metrics and monetary policy factors.
2. Valuation estimates focused on long-term mean reversion thresholds.
3. Technical rules focused on price momentum.

To investigate, we download the Timertrac trade history for the Duration Strategy and replicate its performance using the selected exchange-traded funds (ETF). We look at average trading activity, average trade return, standard deviation of trade returns, trade reward/risk (average return divided by standard deviation), compound annual growth rate (CAGR) and maximum drawdown (MaxDD) at the trade frequency. We look at buying and holding iShares 7-10 Year Treasury Bond ETF (IEF) as an alternative and also look at buying and holding SPDR S&P 500 ETF Trust (SPY). Using the Duration Strategy trade history and daily adjusted opening prices for all specified ETFs during mid-January 2014 through early March 2024, we find that: Keep Reading

How do returns of different asset classes recently interact with the Effective Federal Funds Rate (EFFR)? We focus on monthly changes (simple differences) in EFFR  and look at lead-lag relationships between change in EFFR and returns for each of the following 10 exchange-traded fund (ETF) asset class proxies:

• Equities:
  • SPDR S&P 500 (SPY)
  • iShares Russell 2000 Index (IWM)
  • iShares MSCI EAFE Index (EFA)
  • iShares MSCI Emerging Markets Index (EEM)
• Bonds:
  • iShares Barclays 20+ Year Treasury Bond (TLT)
  • iShares iBoxx $ Investment Grade Corporate Bond (LQD)
  • iShares JPMorgan Emerging Markets Bond Fund (EMB)
• Real assets:
  • Vanguard REIT ETF (VNQ)
  • SPDR Gold Shares (GLD)
  • Invesco DB Commodity Index Tracking (DBC)

Using end-of-month EFFR and dividend-adjusted prices for the 10 ETFs during December 2007 (limited by EMB) through March 2024, we find that: Keep Reading

Does iShares 20+ Year Treasury Bond ETF (TLT) exhibit a predictable monthly pattern due to beginning-of-month dividends and mid-month U.S. government consumer and producer inflation releases? To investigate, we calculate average cumulative return for TLT across the month (from trading day 1 through trading day 23). We also investigate exploitability of findings. Using daily raw and dividend-adjusted levels of TLT from the end of July 2002 (inception) through January 2024 (21.5 years), we find that: Keep Reading

Which comes first, adjustments in U.S. Treasuries yields across the term structure, or government announcement of new U.S. inflation data? To investigate, we relate monthly changes in yields for 1-year, 2-year, 3-year, 5-year, 7-year, 10-year, 20-year and 30-year U.S. Treasuries (GS1 through GS30) to monthly change in overall raw Consumer Price Index (CPI) for various leads and lags. Using monthly yields (average daily yields during a month) for Treasuries as available and monthly CPI during April 1953 through December 2023, we find that:

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Do Federal Funds Rate (FFR) actions taken by the Federal Reserve open market operations committee reliably predict stock market and U.S. Treasuries yield reactions? To investigate, we use the S&P 500 Index (SP500) as a proxy for the stock market and the yield for the 10-Year U.S. Constant Maturity Treasury note (T-note). We look at index returns and changes in T-note yield during the one and two months after FFR actions, separately for FFR increases and FFR decreases. Using data for the three series during January 1990 through December 2023, we find that:

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