FolioBeyond Fixed Income Commentary For September 2021
Performance Summary
Performance Summary
FolioBeyond's algorithmic Fixed Income strategy returned -0.38% and -0.40% in its dynamic and static volatility versions, respectively, in September. The strategies continued their outperformance versus the Bloomberg Barclays U.S. Aggregate Bond Index ("AGG"), which returned -0.87%.
Treasury yields resumed their upward trend off their recent lows. The yield curve between 2-year and 10-year Treasuries steepened by 15 basis points as the 10-year Treasury yield spiked up by 23 basis points in September. Our portfolio continued to maintain a shorter duration than the index with some TIPs and Sub-Investment Grade exposures at the short end.
Source: FolioBeyond’s returns are from SMAs on Interactive Brokers (from January 1, 2019, for Static Volatility and from November 3, 2020, for Dynamic Volatility) and back-tested simulated results prior to that. AGG and Multisector Bond Category returns are from Morningstar.
* FolioBeyond Dynamic and Static Volatility returns are net of underlying ETF fees and 30 bp assumed management fee. Although the 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.
Highlight: Choices for Rising Interest Rates
In the current environment where the bond market may be at an inflection point with respect to the future direction of interest rates, it is helpful to review the different alternatives available in the marketplace.
Regardless of individual macro views, it is important for portfolio managers to evaluate the benefits of various rising rates strategies since major changes in the market environment may require adjustments to portfolio positioning.
The table below outlines and compares four approaches to address risk under rising interest rates.
Floating rate instruments will benefit from their coupon rates going up as short rates rise. However, there will be no benefit from movements along most of the yield curve other than LIBOR and its most likely successor SOFR. Since the intermediate/long term sector of the bond market is much more reactive to changes in economic forecasts and inflationary expectations, the overall upside from a floating rate portfolio may be limited or delayed in a rising rate environment.
Shorting Treasury bonds and futures or buying inverse Treasury ETFs provide the most direct hedge against rising intermediate/long term Treasury yields. The downside is negative carry that reduces any limited income a portfolio might be generating currently in this low interest rate environment. So, this strategy is dependent on getting the timing right, which is always a challenge.
Treasury Inflation Protected Securities (“TIPS”) can provide good protection when interest rates rise if there is a concurrent increase in inflationary expectations. Investors, however, need to incorporate the duration effect in TIPS. The most common TIPS have long durations, so depending on how much inflation
Regardless of individual macro views, it is important for portfolio managers to evaluate the benefits of various rising rates strategies since major changes in the market environment may require adjustments to portfolio positioning.
The table below outlines and compares four approaches to address risk under rising interest rates. We discuss below some of the highlights as well as the pros/cons of each instrument/strategy.
While we believe our approach offers an advanced, cutting-edge solution, no process is ideal. It does pay to utilize a combination of different methods. In a portfolio context, the goal should be to combine less correlated strategies that provide positive portfolio benefits in the long run. FolioBeyond’s modeling approach has provided a less correlated return stream compared to common benchmarks and industry averages.
As a reminder, our model portfolios are available on Folio Institutional, Boutique Exchange, and as the S-Network FolioBeyond Optimized Fixed Income Index available on SMArtX and C8 Technologies. Our algorithm can also be customized and linked to other custodian platforms. Please contact us to explore how our portfolio solutions can help achieve your goals.
