Can Long-Only Investors Use Momentum to Beat the US Treasury Market?

That was the question posed by J. Benson Durham, policy adviser, Federal Reserve Bank of New York, in the latest issue of FAJ,

The literature on momentum is vast. No previous study, however, has examined trading rules along government bond term structures. Under index-duration-neutral and long-only constraints and with low trading costs, an equally weighted average strategy across 20 look-back windows produces an information ratio of 0.46, given US Treasury total return data from March 1985 through December 2013. Unlike momentum in other asset classes, excess relative returns for this asset class are positively skewed and load favourably on risk metrics. Returns correlate with term premium estimates and yield curve factors, but substantial variance remains unexplained and the alphas are meaningfully positive.

And,

Evidence of momentum along the US Treasury term structure is compelling compared with similar price history findings for other asset classes. These reported index-duration-neutral abnormal relative returns are sizeable relative to tracking error, are positively skewed, are uncorrelated with common risk factors, and have positive alphas with respect to estimated forward term premium and other yield curve factors.

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