Simple High Yield Bond Momentum Strategy

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Simple High Yield Bond Momentum Strategy

edited Mar 10, 2017

Momentum Seasonal Trends Asset Allocation ETFs

This simple algorithm monitors 100-day trailing momentum of High Yield Bonds (HYG) and US Treasuries (IEF). 100% of portfolio equity is then allocated to the top performing asset on the first day of every quarter. The result is higher risk-adjusted performance since HYG's inception in 2007. Further backtest of this strategy using Vanguard mutual funds here indicates consistent performance going back to as far as 1988. Most noticeable was the strategy's performance during the 2008 crisis when junk bonds crashed along with the stock market.

Due to a potential rising interest rates environment in the near future, using US Treasuries as the "hideout" asset when High Yield Bonds lose momentum might not produce performance results that are comparable to the past 3 decades. However, the system's robustness still appears to be staying intact during the recent dive in US Treasuries as yields took off to levels not seen since 3 years ago.

STRATEGY HIGHLIGHTS (Jan 1988- Nov 2016, based on monthly returns)

Annualized Return: 8.3%
Volatility/Std. Deviation: 4.4%
Beta to S&P 500: 0.35
Max Drawdown: -7%
Best Year: +20.6%
Worst Year: -4.3%

1 response

Hey, this is great. I'm impressed it works. And it looks like it continues to work out-of-sample. You can get more alpha out of it if you use TLT instead (though a lot more volatility as well) -- it actually outpaces SPY if you use TLT for the treasuries instead.

I was curious what it'd look like as part of a bonds-equities strategy, so here's what it looks like (using TLT) with a bit of S&P500 to bring beta-to-SPY to near 0.

Treasuries are a classic safe haven. But with interest rates near nill and only going up, treasuries already overpriced... Maybe equities and treasuries crash together next time. Or maybe not. Who knows. Probably people (and algos) will continue to use it as a safe haven, driving its prices up when SPY crashes.

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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian.

In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.