Gains from Active Bond Portfolio Management Strategies

Abstract

The belief that excess returns can be achieved by correctly timing changes in yields and/or yield spreads motivates active bond portfolio management strategies. Given the rich literature linking yield spread patterns to both the business cycle and changes in short-term interest rates, the authors motivate and demonstrate the efficacy of simple spread-trading strategies tied to both. Using 34 years of fixed income returns, they demonstrate that straightforward rules would have led to superior risk-adjusted performance relative to standard fixed-income benchmarks. Furthermore, the strategies tied to short-maturity interest rates are based on the use of past information only.

TOPICS: Fixed-income portfolio management, style investing, information providers/credit ratings, statistical methods