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Evading the Hawks: Bond Momentum Investing
Rates investors who follow a momentum strategy buy sovereign bonds with relatively strong recent performance and sell those that have had relatively weak recent performance. Between Dec. 10, 2021, and Oct. 14, 2022, rates-momentum investing generated a positive price return of 122 basis points (bps) per unit of duration. This was by far the strategy’s best 10-month return in the past decade and provided a bright spot amid the darkness of a global rout in sovereign bonds.
Looking at deeper history, since 2012, trend-following in bonds tended to do well, overall, in periods of central-bank tightening (shaded in the exhibit below). While we can’t see the future, one thing is clear: When global fixed income investors have been squeezed by hawkish central-bank policy, rates momentum was a defensive play.
Rates-momentum performance diverged from global bonds in tightening cycles
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