Fixed Income Analysis

Fixed Income Analysis

Note

Data on this page was last updated on December 05, 2022

Expectations

Expectations are all about trying to identify future expectations of a particular asset.

Warning

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.

Annualized Performance Metrics (Rf = 2.00%)
Return Std Dev Sharpe Beta
Corporate - Fallen Angels 6.5% 0.1007 0.4361 0.624
Corporate - Investment Grade 4.72% 0.0845 0.3134 1.127
Treasuries 7-10 Years 3.85% 0.0674 0.2672 0.959
Treasuries Inflation Protection 3.65% 0.0630 0.2538 0.812
Bechmark (Aggregate Bond Index) 3.04% 0.0506 0.1977 1.000
Index - Aggregate Bond Index 3.04% 0.0506 0.1977 1.000
Corporate - High Yield 4.32% 0.1173 0.1924 0.457
Treasuries 20+ Years 4.79% 0.1424 0.1912 1.901
Treasuries 3-7 Years 2.78% 0.0400 0.1864 0.494
International - Emerging Market 3.88% 0.1131 0.1617 0.736
Treasuries Extended Duration 4.62% 0.2273 0.1121 2.524
International Bonds 1.95% 0.0367 -0.0184 0.540
International - Corporate 0.22% 0.0942 -0.1871 0.677
International - Treasuries -0.04% 0.0856 -0.2355 0.834
Treasuries 1-3 Years 1.67% 0.0142 -0.2370 0.152

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.

Click to Show the performance tables by stage of the business cycle.
Annualized Performance in a Recession (Rf = 2.00%)
Return Std Dev Sharpe
Treasuries 1-3 Years 5.95% 0.0229 1.6876
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
Annualized Performance in a Recovery (Rf = 2.00%)
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 1.3538
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 -0.6133
Annualized Performance in a Early Expansion (Rf = 2.00%)
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 -1.8192
Annualized Performance in a Mid Expansion (Rf = 2.00%)
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 -1.7377
Annualized Performance in a Late Expansion (Rf = 2.00%)
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 -0.8327
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
Annualized Performance in a Imminent Recession (Rf = 2.00%)
Return Std Dev Sharpe
Corporate - Investment Grade 6.5% 0.0798 0.5512
Bechmark (Aggregate Bond Index) 4.29% 0.0528 0.4215
Index - Aggregate Bond Index 4.29% 0.0528 0.4215
Treasuries 1-3 Years 2.7% 0.0170 0.3916
Treasuries 7-10 Years 4.65% 0.0708 0.3649
Treasuries 3-7 Years 2.93% 0.0469 0.1911
Treasuries 20+ Years 4.31% 0.1433 0.1571
Treasuries Inflation Protection 2.66% 0.0624 0.1013
Treasuries Extended Duration 2.22% 0.2225 0.0090
Corporate - Fallen Angels 1.9% 0.0977 -0.0120
International - Emerging Market 1.77% 0.1189 -0.0207
Corporate - High Yield 1.58% 0.0977 -0.0436
International Bonds 1.72% 0.0529 -0.0555
International - Treasuries -4.96% 0.1062 -0.6446
International - Corporate -5.61% 0.1103 -0.6774
Note

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 6.5% 0.0798 0.5512
Treasuries 7-10 Years 4.65% 0.0708 0.3649
Treasuries 20+ Years 4.31% 0.1433 0.1571
Bechmark (Aggregate Bond Index) 4.29% 0.0528 0.4215
Index - Aggregate Bond Index 4.29% 0.0528 0.4215

Annualized Metrics (Rf = 2.00%)

Important

Avoid the following equity classes:

Return Std Dev Sharpe
International - Emerging Market 1.77% 0.1189 -0.0207
International Bonds 1.72% 0.0529 -0.0555
Corporate - High Yield 1.58% 0.0977 -0.0436
International - Treasuries -4.96% 0.1062 -0.6446
International - Corporate -5.61% 0.1103 -0.6774
Annualized Metrics (Rf = 2.00%)

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.

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

Zero iis the performance of Aggregate Bond Index, Above zero is performance in excess of the market, anything below is underperformance.

Rotation Chart

Rotation chart of Rate of Change, y and x axis is rotion of rate of change.

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

Rolling Performance
Trend Efficiency Ratio One Month Three Month Six Month One Year Drawdown
Treasuries 1-3 Years -0.12 0.78 -1.08 -2.43 -4.92 -4.97
Treasuries 3-7 Years 0.08 2.93 -1.37 -3.62 -9.69 -9.98
Index - Aggregate Bond Index 0.17 4.67 -1.94 -4.57 -13.41 -13.44
Corporate - High Yield -0.02 2.68 0.83 -3.61 -12.53 -13.47
International Bonds -0.08 2.92 -0.26 -3.01 -14 -14.18
Treasuries Inflation Protection 0.06 3.58 -4.13 -7.35 -14.68 -14.95
Treasuries 7-10 Years 0.11 4.77 -2.64 -5.4 -14.77 -15.19
Corporate - Fallen Angels -0.07 3.24 -0.98 -4.19 -16.04 -17.31
Corporate - Investment Grade 0.19 7.52 -0.91 -4.57 -18.09 -18.39
International - Corporate 0.14 10.03 5.05 -5.49 -18.66 -19.17
International - Emerging Market 0.17 9.25 1.67 -4.21 -19.6 -20.3
International - Treasuries 0.1 9.7 3.39 -6.1 -20.06 -20.5
Treasuries 20+ Years 0.27 10.66 -5.2 -10.26 -29.65 -29.79
Treasuries Extended Duration 0.33 15.36 -6.34 -12.84 -36.95 -37.1
Drawdown is calculated from the 52 week high, less current price. The draw down will not reflect a loss that is longer than one year. Trend is based off our own propritary trend follwing model.

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 -4.97
Treasuries 3-7 Years -9.98
Index - Aggregate Bond Index -13.44
Corporate - High Yield -13.47
International Bonds -14.18
Treasuries Inflation Protection -14.95
Treasuries 7-10 Years -15.19
Corporate - Fallen Angels -17.31
Corporate - Investment Grade -18.39
International - Corporate -19.17
International - Emerging Market -20.3
International - Treasuries -20.5
Treasuries 20+ Years -29.79
Treasuries Extended Duration -37.1