Written on 27 June 2019.
Two new studies produced as part of the Amundi research chair on “ETF, Indexing and Smart Beta Investment Strategies” focus on the two factors that explain a large fraction of differences in the cross-section of bond returns, namely “value” and “momentum”, using economically justified proxies for these attributes.
In the publication entitled "Factor Investing in Fixed-Income – Defining and Exploiting Value in Sovereign Bond Markets", the authors propose a deﬁnition of value in Treasury bonds that is more satisfactory than those found in the recent literature, and that allows for statistically signiﬁcant and economically relevant predictions of cross-sectional excess returns.
In a companion paper entitled "Factor Investing in Fixed-Income – Cross-Sectional and Time-Series Momentum in Sovereign Bond Markets”, they undertake a systematic, security-level analysis of momentum and reversal strategies in US Treasuries, covering more than 40 years of data.
Commenting on this research, Riccardo Rebonato, Professor of Finance at EDHEC-Risk Institute, EDHEC Business School, said “Return predictability in Treasury Bond market is currently one of the most exciting areas for smart-beta investment. The papers mentioned above are two contributions in a much wider research programme at EDHEC, focused on the cross-sectional and time series predictability in the fixed-income space”.
Bruno Taillardat, Head of Smart Beta & Factor Investing at Amundi, added his thoughts: "The increasing adoption of Smart Beta and factor-based solutions, particularly in the area of fixed income investment, represents an exciting challenge for asset managers seeking to design the right solutions to address clients' needs. To further enhance Amundi's strong engagement to helping investors meet their asset allocation goals, our partnership with the EDHEC-Risk Institute is a key element to strengthen our leadership in providing education and research tools."
In a companion paper released in May entitled Factor Investing in Sovereign Bond Markets - A Time-Series Perspective, the same authors focused on the two factors that explain a large fraction of differences over time in bond returns, namely the “level” or “slope” of the yield curve.