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Simple High Yield Bond Momentum Strategy

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%

Clone Algorithm
96
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Backtest from to with initial capital
Total Returns
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Alpha
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Beta
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Sharpe
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Sortino
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Max Drawdown
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Benchmark Returns
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Volatility
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Returns 1 Month 3 Month 6 Month 12 Month
Alpha 1 Month 3 Month 6 Month 12 Month
Beta 1 Month 3 Month 6 Month 12 Month
Sharpe 1 Month 3 Month 6 Month 12 Month
Sortino 1 Month 3 Month 6 Month 12 Month
Volatility 1 Month 3 Month 6 Month 12 Month
Max Drawdown 1 Month 3 Month 6 Month 12 Month
# Backtest ID: 585630a822f90061f9b8c18e
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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.

Clone Algorithm
34
Loading...
Backtest from to with initial capital
Total Returns
--
Alpha
--
Beta
--
Sharpe
--
Sortino
--
Max Drawdown
--
Benchmark Returns
--
Volatility
--
Returns 1 Month 3 Month 6 Month 12 Month
Alpha 1 Month 3 Month 6 Month 12 Month
Beta 1 Month 3 Month 6 Month 12 Month
Sharpe 1 Month 3 Month 6 Month 12 Month
Sortino 1 Month 3 Month 6 Month 12 Month
Volatility 1 Month 3 Month 6 Month 12 Month
Max Drawdown 1 Month 3 Month 6 Month 12 Month
# Backtest ID: 59838cfb9e8b0c55eccd5d00
There was a runtime error.