FolioBeyond Fixed Income Commentary For January 2020
FolioBeyond’s algorithm underlying the S-Network FolioBeyond Optimized Fixed Income Index (SNFBFI) started 2020 with a strong total return of 2.20%* versus 1.92% for the Bloomberg Barclays U.S. Aggregate Bond Index.
As the bond market rallied due to Coronavirus fears, the Treasury curve flattened by 16 basis points. For the month of January, the 10-year Treasury yield fell by 41 basis points while the 2-year Treasury declined by 25 basis points. Implied volatility levels in the 1-year swaption market picked up relative to historicals, increasing from 75% of historicals to 113% by month end.
* SNFBFI’s returns are net of underlying ETF fees and 30 bp assumed management fee. Although information herein is believed to be reliable, FolioBeyond makes no representation or warranty as to its accuracy, and information and opinions reflected herein are subject to change at any time without notice. The past performance information presented herein is not a guarantee of future results.
** Composite figures are simple averages and include actively managed mutual funds from Morningstar Categories US Intermediate Core-Plus Bond, US Fund Multisector Bond and US Fund Nontraditional Bond.
While the market moves were more significant than in recent months, they were modest enough not to trigger a rebalancing of the algorithmic portfolio as risk levels remained within the tolerance range of targets.
More than 50% of the returns for SNFBFI in January can be attributed to the duration exposures in long- term Treasuries and long-term Municipal Credit. The bulk of the remainder of positive return came from exposure to primarily US Government Agency Mortgage REITs. The return from short dated High Yield Corporate holding was flat for the month as its duration effect was offset by modest spread widening.
While the model allocations remained constant during the month, the daily, automatic refreshing of the optimization algorithm based on up-to-date market levels and analytics will allow our strategy to rebalance the portfolio on a timely basis as market conditions change. Some of the factors that can lead to a more conservative portfolio positioning include strong downward momentum effects, continued spike in implied volatility levels, reduction of correlation benefits across various sector holdings, and changing relative valuation relationships that favor high grade products in relation to their risk profile. On the flip side, a normalization of the markets will allow our strategy to continue to harvest higher income and take advantage of correlation benefits in the existing portfolio with potential minor adjustments as relative value relationships diverge.
Please contact us to explore how our low-cost, efficiently executed algorithmic strategy can fit into your overall, alpha-generating fixed income bucket, or how the model can be customized to suit your specific investment needs.
