The strategy involves investing in 10Y bonds from select countries based on a combined z-score of yield curve steepness, bond, equity, and commodity returns, with positions rebalanced monthly and capped at extremes.
ASSET CLASS: bonds, futures | REGION: Global | FREQUENCY:
Monthly | MARKET: bonds | KEYWORD: Bond
I. STRATEGY IN A NUTSHELL
The strategy trades 10-year government bonds from the U.S., U.K., Germany, Japan, Canada, and Australia. A combined z-score is computed monthly as the equally-weighted average of four indicators: yield curve steepness, past bond returns, past equity returns, and past commodity returns (sign only). Z-scores are capped at ±1, with position sizes proportional to the absolute z-score. The portfolio is equally weighted and rebalanced monthly.
II. ECONOMIC RATIONALE
By combining multiple simple bond timing signals, the strategy outperforms individual strategies. Its predictive power is robust across economic cycles, inflation regimes, and equity market conditions. Returns arise from bond market timing, not structural bond risk, and are especially strong during large market movements, highlighting its effectiveness in dynamic environments.
III. SOURCE PAPER
Predicting Bond Returns: 70 years of International Evidence [Click to Open PDF]
Guido Baltussen, Martin Martens, Olaf Penninga, Erasmus University Rotterdam (EUR); Northern Trust Corporation – Northern Trust Asset Management, Erasmus University Rotterdam, Robeco Asset Management
<Abstract>
We examine the predictability of government bond returns using a deep sample spanning 70 years of international data across the major bond markets. Using an economic, trading-based testing framework we find strong economic and statistical evidence of bond return predictability with a Sharpe ratio of 0.87 since 1950. This finding is robust over markets and time periods, including 30 years of out-of-sample data on international bond markets and a set of nine additional countries. Furthermore, the results are consistent over economic environments, including prolonged periods of rising or falling rates, and is exploitable after transaction costs. The predictability relates to predictability in inflation and economic growth. Overall, government bond premia display predictable dynamics and the timing of international bond market returns offers exploitable opportunities to investors.
IV. BACKTEST PERFORMANCE
| Annualised Return | 8.7% |
| Volatility | 10% |
| Beta | -0.01 |
| Sharpe Ratio | 0.87 |
| Sortino Ratio | -0.506 |
| Maximum Drawdown | N/A |
| Win Rate | 77% |
V. FULL PYTHON CODE
