Comments on: Tactical Asset Allocation Based on the Yield Curve

By: Investing Based on the Yield Curve – REITs Like it Steep – World Beta – Engineering Targeted Returns and Risk

Thu, 04 Mar 2010 01:51:33 +0000

[...] is an old post where we took at a look at investing based on the yield curve. I updated the charts here with more and less granularity. From the tables one could infer that [...]

By: Guest

Guest — Fri, 20 Nov 2009 19:57:35 +0000

The results for bonds are distorted by your choice of the 30YT as the vehicle. There might be a position for SHY when the yield curve inverts, but definitely not one for the TLT.

Another “asset class” to look at might be non-marked-to-market bonds, i.e. an income ladder. A 10-year Treasury ladder held to maturity really has NO price movement, per se, but you get 10 years of income. As the purchases mature, the funds are reinvested for income with fresh 10YTs. The initial setup requires buys up and down the curve, though. In the context of a portfolio with non-bonds included, the 10YT ladder could be “rebalanced” by adjusting how much is purchased at the long end each year, to keep the total cash in the ladder equal to the proper proportion of the total.

If you want to look at econometrics for buying junk and corporate instead of Ts, I suggest a mix of multi-year changes in CPI and a non-linear relationship with prevailing 10YT rates. Of course, I’m certain that relative momentum works just as well in marked-to-market fixed income as it does in equities …

By: wkevinw

wkevinw — Thu, 19 Nov 2009 01:29:11 +0000

I try to use a kind of "yield curve" device based on changes in short term interest rates. It behaves much like your blue "yield curve rotation" chart. Note that it stopped being the best performer in late 1999 or so, and was just OK after ~1988 (1988-1999). I think this does have value.

I have been trying to find the reason for this behavior for some time. It appears to be related to the underlying inflation forces. When they get weaker, the yield curve seems to drive the stock market performance less. I haven't done any quantitative work on this, but I have observed what your chart implies.

Thanks for the post.

By: oyz79

oyz79 — Tue, 17 Nov 2009 01:36:54 +0000

Great work as always Meb. How about using the yield curve model with the TAA model – in other words, buy the yield curve rotation system only if the corresponding asset class index is also above a long-term moving average? I suspect the indices may be above long term moving averages most of the time when the yield curve is giving a long signal for the various asset classes, but it would be interesting to look at.

By: abcj

abcj — Tue, 17 Nov 2009 01:27:04 +0000

Ok, Meb, I'm confused. How did you combine the momentum and yield curve systems? Can you walk us through the mechanics? Thanks

By: jasonharris

jasonharris — Mon, 16 Nov 2009 22:18:49 +0000

The curve is between 0-2% 42% of the time and above 2% 45% of the time. Does it increase the total return if you break down these two into smaller increments? Perhaps 0-1%, 1-2%, 2-3% and >3%? Thank you!

By: WorldBeta

WorldBeta — Mon, 16 Nov 2009 17:50:17 +0000

yah

By: dskills

dskills — Mon, 16 Nov 2009 17:48:13 +0000

Is the momentum the asset class rotation study?

By: gerrydantone

gerrydantone — Mon, 16 Nov 2009 16:52:34 +0000

That would seem to be tricky since only 2 classes are available to rotate into in the first place when the yield curve is below 0%.

However, when the yield curve is above 2%, you do have a possible choice of 4 classes from which you could rotate into the best 2…

By: WorldBeta

WorldBeta — Mon, 16 Nov 2009 16:45:17 +0000

i'm just surprised no one is mentioning combining the momentum and yield curve systems…..ahem ahem…