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Using the Yield Curve to Hedge a 60/40 Portfolio and Increase Sharpe Ratio

Hi everyone,

I recently investigated whether or not using the Treasury yield curve would be an effective indicator of when to hedge a 60/40 portfolio. I projected a bear market for the 60/40 portfolio as 18 months from an inversion of the yield curve (which I measure at the 5 year Treasury rate - 3 month Treasury rate). Given that I have a bear market projection, for the 18 months after making a bear forecast, I will hedge the portfolio using either of 2 different techniques I tested (1. The equivalent of holding more cash (Passive) 2. Long commodities, short equities, and long bonds (Active)). I was able to increase the monthly Sharpe ratio of the portfolio over the given time period from 0.11 to 0.26 (Active). If anyone wants to continue some research maybe on a longer time horizon, I would suggest importing Nasdaq pricing data from FRED (along with the Treasury data), which dates back till 1971.

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1 response

Thanks for sharing!