As pundits wrestle over the cause, implications, and sustainability of the recent massive moves in interest rates, I’ll instead delve into the two terms most often blamed for these shifts in rates: R-star and the Term Structure Premium. Unfortunately, what most want—a measure of them—is unknowable. But we can benefit from understanding the theories and models behind these terms. We can glean guidance on what we need, namely a better understanding of the risks and rewards of buying longer-maturing bonds at current rate levels. I contend that now is a good time to secure future cash flows by buying bonds, although determining the precise amount to invest remains a challenge.
Box spreads represent an opportunity to borrow and lend via the options market, at similar (and often better) rates than those that are available in the treasury bill market.
As the chief research officer of Buckingham Strategic Partners, the issue I am being asked to address most often is about fixed income strategies when yields are at historically low levels and inflation risk is heightened due to the unprecedented increase in money creation (through quantitative easing), the extraordinary expansionary fiscal spending around the globe, and the war in Ukraine driving prices higher (especially for food and energy). As always, to answer the question we turn first to the academic evidence on which investments in general provide the best hedges against inflation.
The reported results we covered have important implications for investors in terms of portfolio construction, risk monitoring, and manager selection. Because these common factors explain almost all the returns of bond portfolios, investors should construct their bond portfolios using low-cost, passively (systematically) managed funds with these factors in mind and then carefully monitor their exposure to these systematic risks.
Macro risks and the term structure of interest rates Bekaert, Engstrom, ErmolovJournal of Financial Economics, 2021A version of this paper can be found hereWant to read [...]
My August 17, 2020, article for Advisor Perspectives, “Factor-Based Investing Beats Active Management for Bonds,” provided the evidence from a series of academic papers on [...]
Factor Investing in Sovereign Bond Markets: Deep Sample Evidence Baltussen, Martens and Penningaworking paper, 2021A version of this paper can be found hereWant to read our [...]
Part 2: From understanding factors to solving investor problems In Part 1, we defined fixed income factors. But factors alone will not solve each investor’s [...]
Figure 1: Investors are between a rock and a hard place.Source: Getty Images. Invesco. Investors are stuck between a rock and a hard place. On [...]
The Returns to Private Debt: Primary Issuances vs. Secondary Acquisitions Douglas Cumming, Grant Fleming, and Zhangxin (Frank) Liu Financial Analysts JournalA version of this paper [...]
Predicting Bond Returns: 70 Years of International Evidence Guido Baltussen, Martin Martens, Olaf PenningaWorking PaperA version of this paper can be found hereWant to read our [...]
Do treasuries, most yielding well south of 1%, have a place in a modern portfolio? Currently at these levels, I conclude they don’t. Modern Portfolio [...]
In mid-February, prior to the market craziness, Jon Seed posted an article on our site titled: “Price”, ETFs, and Bond Market Liquidity. This was a [...]
Last week, there were some pretty big dislocations between bond mutual funds and ETFs. I picked one specific example I found interesting, comparing the Vanguard [...]
Multiple events last year reminded us that “price” is a nebulous concept. The most well-publicized price disagreement came in September of 2019 when the public [...]
Investing in US 10-year Yields with News Sentiment Nina Gotthelf and Matthias W. UhlJournal of Investing, Winter 2018A version of this paper can be found hereWant to read [...]
Factors, or "style" investing, seems to be all the rage these days, including the use of factors in fixed income (here, here and here are good [...]
Which Investment Factors Drive Corporate Bond Returns Turan G. Bali, Avanidhar Subrahmanyam, & Quan Wen A version of this paper can be found here. Want to [...]