Fixed Income Analysis
Fixed Income Analysis
Data on this page was last updated on May 18, 2023
Expectations
Expectations are all about trying to identify future expectations of a particular asset.
A practitioner needs to confirm the expectations with a trend following model and risk management rules. It should not be viewed in a vacuum, and external forces should always be considered.
Long-term (CAPM) Expectations
Running the traditional CAPM model sets the framework for analyzing a multi-factor regression model. It also helps to understand the academic world’s perspective on the asset class. I would not put too much weight on these statistics unless you are a pension fund with very long-term investment horizons. Most of us are not and need to adjust our expectations for both the business cycle and economic factors.
| Return | Std Dev | Sharpe | Beta | |
|---|---|---|---|---|
| Corporate - Fallen Angels | 6.35% | 0.1001 | 0.4245 | 0.618 |
| Corporate - Investment Grade | 4.59% | 0.0848 | 0.2974 | 1.131 |
| Treasuries 7-10 Years | 3.82% | 0.0684 | 0.2582 | 0.976 |
| Treasuries Inflation Protection | 3.55% | 0.0634 | 0.2374 | 0.814 |
| Treasuries 3-7 Years | 2.81% | 0.0411 | 0.1903 | 0.514 |
| Corporate - High Yield | 4.23% | 0.1166 | 0.1860 | 0.461 |
| Bechmark (Aggregate Bond Index) | 2.99% | 0.0514 | 0.1857 | 1.000 |
| Index - Aggregate Bond Index | 2.99% | 0.0514 | 0.1857 | 1.000 |
| Treasuries 20+ Years | 4.53% | 0.1437 | 0.1718 | 1.922 |
| International - Emerging Market | 3.68% | 0.1130 | 0.1440 | 0.755 |
| Treasuries Extended Duration | 4.11% | 0.2280 | 0.0900 | 2.548 |
| International Bonds | 1.86% | 0.0383 | -0.0410 | 0.555 |
| International - Corporate | 0.3% | 0.0946 | -0.1781 | 0.689 |
| Treasuries 1-3 Years | 1.72% | 0.0150 | -0.1928 | 0.164 |
| International - Treasuries | -0.17% | 0.0865 | -0.2475 | 0.854 |
Business Cycle Expectations
The first step to estimating proper expectations is to understand the performance metrics filtered by our six business cycle stages. Core equities are sensitive to inflation expectations, growth, and credit risk; which often correlate to the business cycle.
| Return | Std Dev | Sharpe | |
|---|---|---|---|
| Treasuries 1-3 Years | 5.95% | 0.0229 | 1.6877 |
| Treasuries 3-7 Years | 11.84% | 0.0600 | 1.6068 |
| Treasuries 7-10 Years | 13.8% | 0.0859 | 1.3445 |
| Treasuries 20+ Years | 18.74% | 0.1738 | 0.9433 |
| Treasuries Extended Duration | 29.77% | 0.3563 | 0.7637 |
| Bechmark (Aggregate Bond Index) | 6.69% | 0.1049 | 0.4369 |
| Index - Aggregate Bond Index | 6.69% | 0.1049 | 0.4369 |
| Treasuries Inflation Protection | 5.61% | 0.1089 | 0.3234 |
| Corporate - Investment Grade | 6.66% | 0.1604 | 0.2836 |
| International Bonds | -1.64% | 0.0750 | -0.4776 |
| International - Emerging Market | -12.27% | 0.2667 | -0.5251 |
| Corporate - High Yield | -11.45% | 0.2310 | -0.5715 |
| International - Treasuries | -6.54% | 0.1246 | -0.6732 |
| Corporate - Fallen Angels | -23.93% | 0.3694 | -0.6886 |
| International - Corporate | -18.07% | 0.1602 | -1.2290 |
| Return | Std Dev | Sharpe | |
|---|---|---|---|
| Corporate - Fallen Angels | 25.71% | 0.0761 | 3.0513 |
| Corporate - High Yield | 18.19% | 0.1129 | 1.4042 |
| International - Emerging Market | 14.63% | 0.0914 | 1.3537 |
| International - Corporate | 14.52% | 0.0907 | 1.3510 |
| Treasuries Inflation Protection | 8.09% | 0.0584 | 1.0198 |
| Corporate - Investment Grade | 8.22% | 0.0706 | 0.8615 |
| Bechmark (Aggregate Bond Index) | 4.1% | 0.0415 | 0.4906 |
| Index - Aggregate Bond Index | 4.1% | 0.0415 | 0.4906 |
| International - Treasuries | 6.46% | 0.0891 | 0.4895 |
| Treasuries 3-7 Years | 2.06% | 0.0416 | 0.0111 |
| Treasuries 7-10 Years | 1.7% | 0.0739 | -0.0424 |
| International Bonds | 1.51% | 0.0266 | -0.1868 |
| Treasuries 20+ Years | -2.61% | 0.1476 | -0.3072 |
| Treasuries Extended Duration | -5.65% | 0.2305 | -0.3261 |
| Treasuries 1-3 Years | 1.17% | 0.0136 | -0.6134 |
| Return | Std Dev | Sharpe | |
|---|---|---|---|
| Corporate - Fallen Angels | 8.42% | 0.1038 | 0.6050 |
| Treasuries Inflation Protection | 4.28% | 0.0590 | 0.3763 |
| Corporate - High Yield | 5.4% | 0.0906 | 0.3664 |
| Corporate - Investment Grade | 4.06% | 0.0598 | 0.3358 |
| Treasuries 20+ Years | 6.96% | 0.1545 | 0.3138 |
| Treasuries Extended Duration | 9.33% | 0.2482 | 0.2888 |
| Treasuries 7-10 Years | 3.48% | 0.0655 | 0.2197 |
| International - Emerging Market | 3.51% | 0.0766 | 0.1914 |
| Bechmark (Aggregate Bond Index) | 2.49% | 0.0360 | 0.1292 |
| Index - Aggregate Bond Index | 2.49% | 0.0360 | 0.1292 |
| International - Corporate | 0.64% | 0.0938 | -0.1442 |
| Treasuries 3-7 Years | 1.55% | 0.0305 | -0.1487 |
| International - Treasuries | -1.18% | 0.0853 | -0.3677 |
| International Bonds | -2.32% | 0.0374 | -1.1379 |
| Treasuries 1-3 Years | 0.29% | 0.0093 | -1.8193 |
| Return | Std Dev | Sharpe | |
|---|---|---|---|
| Corporate - Fallen Angels | 7.41% | 0.0679 | 0.7778 |
| International Bonds | 3.64% | 0.0284 | 0.5597 |
| International - Emerging Market | 4.56% | 0.0623 | 0.4008 |
| Treasuries 20+ Years | 6.27% | 0.1220 | 0.3419 |
| Treasuries Extended Duration | 7.36% | 0.1765 | 0.2966 |
| Corporate - Investment Grade | 3.41% | 0.0498 | 0.2742 |
| Corporate - High Yield | 3.59% | 0.0611 | 0.2526 |
| Treasuries 7-10 Years | 2.34% | 0.0534 | 0.0597 |
| Bechmark (Aggregate Bond Index) | 2.17% | 0.0316 | 0.0468 |
| Index - Aggregate Bond Index | 2.17% | 0.0316 | 0.0468 |
| International - Treasuries | 0.98% | 0.0770 | -0.1322 |
| Treasuries Inflation Protection | 1.3% | 0.0463 | -0.1525 |
| International - Corporate | 0.49% | 0.0879 | -0.1701 |
| Treasuries 3-7 Years | 1.01% | 0.0295 | -0.3343 |
| Treasuries 1-3 Years | 0.39% | 0.0092 | -1.7378 |
| Return | Std Dev | Sharpe | |
|---|---|---|---|
| Corporate - High Yield | 1.24% | 0.0615 | -0.1245 |
| Treasuries Inflation Protection | 0.02% | 0.0496 | -0.3952 |
| Corporate - Fallen Angels | -1.71% | 0.0634 | -0.5771 |
| Treasuries Extended Duration | -7.14% | 0.1532 | -0.5860 |
| Treasuries 20+ Years | -4.37% | 0.1021 | -0.6137 |
| International Bonds | -0.18% | 0.0335 | -0.6438 |
| Bechmark (Aggregate Bond Index) | -0.5% | 0.0370 | -0.6660 |
| Index - Aggregate Bond Index | -0.5% | 0.0370 | -0.6660 |
| Treasuries 7-10 Years | -1.61% | 0.0517 | -0.6879 |
| International - Emerging Market | -3.43% | 0.0762 | -0.7000 |
| Corporate - Investment Grade | -1.76% | 0.0519 | -0.7135 |
| Treasuries 1-3 Years | 0.95% | 0.0125 | -0.8326 |
| Treasuries 3-7 Years | -0.99% | 0.0341 | -0.8639 |
| International - Corporate | -12.07% | 0.0777 | -1.7756 |
| International - Treasuries | -10.69% | 0.0632 | -1.9719 |
| Return | Std Dev | Sharpe | |
|---|---|---|---|
| Treasuries 1-3 Years | 2.92% | 0.0208 | 0.4231 |
| Corporate - Investment Grade | 5.22% | 0.0836 | 0.3762 |
| Bechmark (Aggregate Bond Index) | 3.74% | 0.0577 | 0.2922 |
| Index - Aggregate Bond Index | 3.74% | 0.0577 | 0.2922 |
| Treasuries 7-10 Years | 4.24% | 0.0772 | 0.2829 |
| Treasuries 3-7 Years | 3.17% | 0.0522 | 0.2174 |
| Treasuries 20+ Years | 2.42% | 0.1524 | 0.0263 |
| Treasuries Inflation Protection | 2.14% | 0.0652 | 0.0188 |
| Corporate - Fallen Angels | 2.15% | 0.0952 | 0.0136 |
| Corporate - High Yield | 1.49% | 0.0963 | -0.0537 |
| International - Emerging Market | 0.66% | 0.1165 | -0.1140 |
| International Bonds | 1.31% | 0.0554 | -0.1248 |
| Treasuries Extended Duration | -1.03% | 0.2293 | -0.1301 |
| International - Corporate | -3.82% | 0.1095 | -0.5225 |
| International - Treasuries | -4.76% | 0.1075 | -0.6183 |
The current stage of the business cycle is stage 6 which is a imminent recession.
**
Business Cycle Stage Best performers
| Return | Std Dev | Sharpe | |
|---|---|---|---|
| Corporate - Investment Grade | 5.22% | 0.0836 | 0.3762 |
| Treasuries 7-10 Years | 4.24% | 0.0772 | 0.2829 |
| Bechmark (Aggregate Bond Index) | 3.74% | 0.0577 | 0.2922 |
| Index - Aggregate Bond Index | 3.74% | 0.0577 | 0.2922 |
| Treasuries 3-7 Years | 3.17% | 0.0522 | 0.2174 |
Annualized Metrics (Rf = 2.00%)
Avoid the following equity classes:
| Return | Std Dev | Sharpe | |
|---|---|---|---|
| International Bonds | 1.31% | 0.0554 | -0.1248 |
| International - Emerging Market | 0.66% | 0.1165 | -0.1140 |
| Treasuries Extended Duration | -1.03% | 0.2293 | -0.1301 |
| International - Corporate | -3.82% | 0.1095 | -0.5225 |
| International - Treasuries | -4.76% | 0.1075 | -0.6183 |
Factor Expectations
By this point, you should know that economic factors play a vital role in estimating the future expectations of an asset. Each asset needs to be run through our machine learning regression model to assess what factors are essential and the future expectation for the help.
Current Factor Trends:
| Trend | |
|---|---|
| Economic Growth (Gr) | |
| Monetary Policy (Mp) | |
| Credit - Investment Grade (Cr) | |
| Credit - High Yield (Ch) | |
| Inflation Expectations (Ie) | |
| Real Rates (Rr) | |
| Long-term Real Rates (Rl) | |
| Currency (Cu) | |
| Commodity (Cm) |
Factor investing diversifies the beta (smart beta) between the asset and the factor instead of focusing on the beta between the security and a benchmark. One can estimate what they think the risk premia will be over time and control factor-beta, and use the long-term history for the presumed risk of the factors. That is unacceptable to us; using long-term data might be okay if you are a pension fund with a horizon of 100 years, but we investors have a much shorter investment horizon.
So what we do differently is identify the factor's current trend to calculate the risk premia and expected return of a particular asset. Furthermore, we do not rely on beta alone for sensitivity. Still, we run our regression through a machine-learning algorithm to more accurately model the factor's sensitivity. While our approach is not that academic, it is practical for real-world decision-making and does not require a long history to compute.
| Gr | Mp | Cr | Ch | Ie | Rr | Rl | Cu | Cm | |
|---|---|---|---|---|---|---|---|---|---|
| Benchmark (Aggregate Bond Index) | 0.2452 | 0.0644 | -0.1289 | -0.0187 | 0.1057 | 0.0266 | 0.0499 | -0.0025 | 0.0011 |
| iShares:3-7 Trs Bd ETF | -0.0066 | -0.038 | 0.0223 | 0.0037 | -0.0244 | -0.0315 | -0.0361 | -0.0009 | -0.0001 |
| Treasuries Inflation Protection | 0.0324 | -0.0376 | 0.0063 | 0.0013 | 0.0192 | -0.0614 | -0.0747 | -0.002 | 0.0001 |
| Treasuries 1-3 Years | -0.0033 | -0.0176 | 0.0084 | 0.0014 | -0.0075 | -0.0101 | -0.0104 | -0.0005 | 0 |
| Corporate - Investment Grade | 0.0673 | -0.0267 | -0.0464 | -0.001 | -0.0092 | -0.0465 | -0.059 | -0.0025 | 0.0001 |
| Corporate - High Yield | 0.1762 | 0.0185 | -0.1067 | -0.0153 | 0.0576 | -0.0076 | 0.0044 | -0.0042 | 0.0008 |
| Treasuries 7-10 Years | -0.0115 | -0.0579 | 0.0384 | 0.007 | -0.0462 | -0.0549 | -0.0706 | -0.0016 | -0.0002 |
| Treasuries Extended Duration | -0.051 | -0.1174 | 0.1044 | 0.0188 | -0.1502 | -0.127 | -0.2086 | -0.0009 | -0.0011 |
| Treasuries 20+ Years | -0.0322 | -0.0882 | 0.0821 | 0.0141 | -0.1028 | -0.0979 | -0.1502 | -0.0017 | -0.0006 |
| Corporate - Fallen Angels | 0.2087 | -0.006 | -0.1131 | -0.0195 | 0.0474 | -0.028 | -0.0217 | -0.0022 | 0.0007 |
| Index - Aggregate Bond Index | 0.0295 | -0.0283 | -0.0062 | 0.0009 | -0.0149 | -0.0356 | -0.0433 | -0.0016 | 0 |
| International - Treasuries | 0.071 | -0.0569 | -0.0067 | 0.0001 | -0.0008 | -0.0455 | -0.0398 | -0.0102 | 0.0004 |
| International - Corporate | 0.1182 | -0.0405 | -0.0465 | -0.0053 | 0.0121 | -0.0394 | -0.0305 | -0.0117 | 0.0005 |
| International - Emerging Market | 0.1269 | -0.0072 | -0.0747 | -0.0089 | 0.0367 | -0.0299 | -0.0289 | -0.004 | 0.0005 |
| International Bonds | 0.0317 | -0.0288 | 0 | 0.0013 | -0.0154 | -0.0261 | -0.0298 | -0.0006 | -0.0001 |
| Gr | Mp | Cr | Ch | Ie | Rr | Rl | Cu | Cm | |
|---|---|---|---|---|---|---|---|---|---|
| Benchmark (Aggregate Bond Index) | 0.381 | 0.1 | 0.2 | 0.029 | 0.164 | 0.041 | 0.078 | 0.004 | 0.002 |
| iShares:3-7 Trs Bd ETF | 0.04 | 0.232 | 0.136 | 0.023 | 0.149 | 0.193 | 0.221 | 0.006 | 0.001 |
| Treasuries Inflation Protection | 0.138 | 0.16 | 0.027 | 0.006 | 0.082 | 0.261 | 0.318 | 0.009 | 0 |
| Treasuries 1-3 Years | 0.056 | 0.297 | 0.142 | 0.024 | 0.127 | 0.171 | 0.176 | 0.008 | 0 |
| Corporate - Investment Grade | 0.26 | 0.103 | 0.179 | 0.004 | 0.036 | 0.18 | 0.228 | 0.01 | 0 |
| Corporate - High Yield | 0.45 | 0.047 | 0.273 | 0.039 | 0.147 | 0.019 | 0.011 | 0.011 | 0.002 |
| Treasuries 7-10 Years | 0.04 | 0.201 | 0.133 | 0.024 | 0.16 | 0.19 | 0.245 | 0.006 | 0.001 |
| Treasuries Extended Duration | 0.065 | 0.151 | 0.134 | 0.024 | 0.193 | 0.163 | 0.268 | 0.001 | 0.001 |
| Treasuries 20+ Years | 0.057 | 0.155 | 0.144 | 0.025 | 0.18 | 0.172 | 0.264 | 0.003 | 0.001 |
| Corporate - Fallen Angels | 0.467 | 0.013 | 0.253 | 0.044 | 0.106 | 0.063 | 0.049 | 0.005 | 0.002 |
| Index - Aggregate Bond Index | 0.184 | 0.177 | 0.039 | 0.006 | 0.093 | 0.222 | 0.27 | 0.01 | 0 |
| International - Treasuries | 0.307 | 0.246 | 0.029 | 0 | 0.003 | 0.197 | 0.172 | 0.044 | 0.002 |
| International - Corporate | 0.388 | 0.133 | 0.153 | 0.017 | 0.04 | 0.129 | 0.1 | 0.038 | 0.002 |
| International - Emerging Market | 0.399 | 0.023 | 0.235 | 0.028 | 0.116 | 0.094 | 0.091 | 0.013 | 0.002 |
| International Bonds | 0.237 | 0.215 | 0 | 0.01 | 0.115 | 0.195 | 0.223 | 0.004 | 0.001 |
| Return | Std Dev | Sharpe | |
|---|---|---|---|
| Treasuries 3-7 Years | 15.4% | 0.0560 | 2.3431 |
| Treasuries 7-10 Years | 18.61% | 0.0839 | 1.9395 |
| International - Emerging Market | 8.67% | 0.0666 | 0.9791 |
| International - Treasuries | 5.51% | 0.0770 | 0.4453 |
| Corporate - Fallen Angels | -1.18% | 0.1192 | -0.2633 |
| International - Corporate | -1.58% | 0.0788 | -0.4476 |
| Corporate - High Yield | -1.43% | 0.0643 | -0.5251 |
| Treasuries Extended Duration | -25.37% | 0.2163 | -1.2413 |
| Treasuries Inflation Protection | -4.03% | 0.0393 | -1.5095 |
| Treasuries 20+ Years | -27.76% | 0.1516 | -1.9258 |
| Corporate - Investment Grade | -12.19% | 0.0523 | -2.6639 |
| Benchmark (Aggregate Bond Index) | -11.84% | 0.0425 | -3.1997 |
| Index - Aggregate Bond Index | -13.25% | 0.0328 | -4.5567 |
| International Bonds | -15.91% | 0.0344 | -5.1045 |
| Treasuries 1-3 Years | -8.77% | 0.0125 | -8.4549 |
Factor Analysis Best performers
| Return | Std Dev | Sharpe | |
|---|---|---|---|
| Treasuries 7-10 Years | 18.61% | 0.0839 | 1.9395 |
| Treasuries 3-7 Years | 15.4% | 0.0560 | 2.3431 |
| International - Emerging Market | 8.67% | 0.0666 | 0.9791 |
| International - Treasuries | 5.51% | 0.0770 | 0.4453 |
Avoid the following equity classes:
| Return | Std Dev | Sharpe | |
|---|---|---|---|
| Corporate - Investment Grade | -12.19% | 0.0523 | -2.6639 |
| Index - Aggregate Bond Index | -13.25% | 0.0328 | -4.5567 |
| International Bonds | -15.91% | 0.0344 | -5.1045 |
| Treasuries Extended Duration | -25.37% | 0.2163 | -1.2413 |
| Treasuries 20+ Years | -27.76% | 0.1516 | -1.9258 |
Relative Stregnth Analysis
Relative strength is a strategy used in momentum investing and identifying value stocks. It focuses on investing in stocks or other investments that have performed well close to the market or relevant benchmark. We use relative strength to confirm our assumptions about our expectations. We should see outperformance compared to the benchmark and peers if our assumptions are correct.
Rotation Analysis
A rotation chart can help identify the momentum of a trend. The top-left quadrant is a developing trend, just starting to unfold. The top-right quadrant is a developed trend. A weakening trend is in the bottom-right. And the last quadrant, the bottom-left, is a downtrend.
Relative Rotation, to the market
Rotation Chart
Trend Anlaysis
Trend following is a trading style that attempts to capture gains by analyzing an asset’s momentum in a particular direction. When the price moves in one overall direction, such as up or down, that is called a trend.
Trend traders enter into a long position when security is trending upward. An uptrend is characterized by higher swing lows and higher swing highs. Likewise, trend traders may opt to enter a short position when an asset is trending lower. Or, in our case, managing long-only, chose to avoid securities that are trending down. A downtrend is characterized by lower swing lows and lower swing highs.
Having predefined rules on what is and isn’t a trend also provides us with a method for controlling risk. We know at what price we would not consider being invested in a position. Following our trend system, we always know when we should cut our losses.
Trend Table & Rolling Performance
| Trend | Efficiency Ratio | One Month | Three Month | Six Month | One Year | Drawdown | |
|---|---|---|---|---|---|---|---|
| Treasuries 1-3 Years | -0.13 | 0.13 | 0.92 | 1.62 | -1.28 | -1.84 | |
| Treasuries 3-7 Years | -0.18 | 0.54 | 1.85 | 4.3 | -1.78 | -3.11 | |
| Index - Aggregate Bond Index | -0.12 | -0.14 | 0.35 | 4.69 | -3.73 | -5.4 | |
| International Bonds | -0.26 | 0.78 | 0.95 | 2.39 | -3.75 | -5.46 | |
| International - Corporate | -0.04 | -1.12 | 0.04 | 9.86 | -2.89 | -6.16 | |
| Treasuries 7-10 Years | -0.15 | 0.33 | 1.7 | 5.56 | -4.25 | -6.75 | |
| Corporate - Investment Grade | -0.05 | -1.39 | -0.53 | 6 | -3.93 | -7.32 | |
| Corporate - Fallen Angels | 0.08 | -2.33 | -1.52 | 3.11 | -2.19 | -7.39 | |
| Corporate - High Yield | -0.06 | -1.33 | -0.94 | 1.62 | -2.53 | -7.62 | |
| International - Treasuries | -0.17 | -0.33 | 0.38 | 7.59 | -6.04 | -8.35 | |
| International - Emerging Market | -0.11 | -0.96 | -1.56 | 5.11 | -4.57 | -8.75 | |
| Treasuries Inflation Protection | 0.03 | -0.38 | 1.15 | 3.4 | -8.45 | -9.13 | |
| Treasuries 20+ Years | -0.06 | -1.2 | -0.78 | 8.87 | -12.25 | -15.01 | |
| Treasuries Extended Duration | -0.06 | -1.65 | -2.05 | 11.41 | -16.28 | -19.22 |
Summary
To build a tactical portfolio, we need to understand and set expectations. We start with our macro and factor models. We then need to confirm our assumptions with a relative strength analysis. Finally, we want the ability to control the downside risk when things do not go as expected. We use a trend analysis that sets the point that we will exit no matter what.
| E(r) Business Clycle | E(r) Factor | Relative Rotation | Absolute Rotation | Trend | Efficiency | Drawdown | |
|---|---|---|---|---|---|---|---|
| Treasuries 1-3 Years | -1.84 | ||||||
| Treasuries 3-7 Years | -3.11 | ||||||
| Index - Aggregate Bond Index | -5.4 | ||||||
| International Bonds | -5.46 | ||||||
| International - Corporate | -6.16 | ||||||
| Treasuries 7-10 Years | -6.75 | ||||||
| Corporate - Investment Grade | -7.32 | ||||||
| Corporate - Fallen Angels | -7.39 | ||||||
| Corporate - High Yield | -7.62 | ||||||
| International - Treasuries | -8.35 | ||||||
| International - Emerging Market | -8.75 | ||||||
| Treasuries Inflation Protection | -9.13 | ||||||
| Treasuries 20+ Years | -15.01 | ||||||
| Treasuries Extended Duration | -19.22 |