ETFS: TLT TLH TLO - FIXED INCOME TEAM, June 27, 2017
Our current trading signal for US treasury bonds (ETFs: TLT, TLH, and TLO) is SELL. We utilize a systematic approach to forecast future bond prices. Based on a statistical framework that focuses on market supply and demand, we investigate the relationship between bond prices and macro drivers such as Fed monetary policies and FOMC open market operations, money supplies, the yield curve and butterflies, inflation rates and expectations, real interest rates and breakeven inflation, fiscal deficits, public and private debts, bond issuance volumes, sovereign and credit spreads, capacity utilization, employment and payroll levels, consumer and business confidence, manufacturing surveys, orders, sales, inventories, housing sales and prices, private and public expenditure, personal income, corporate earnings, credit growth, bond fund and ETF flows, financial stress, and lending conditions. Changes in these factors have profound effects on the fixed-income market. Besides the fundamentals, technical indicators are also treated with great respect in the algorithm's construction.
Based on a scale from 0 to 100, with 100 being the most bullish and 0 being the most bearish, our latest model reading for US treasury bonds is 84.36. The average return of the trades is 10.96% and the annualized return of the trades is 17.90%. Measuring the risk-adjusted performance, the model has produced a Sharpe Ratio of 1.28, which is driven by the model's standard deviation of 13.97%. For comparison purpose, the Sharpe Ratio of the buy and hold strategy for US treasury bonds is 0.44. The Sortino Ratio, which measures the relative returns of the model over its downside deviation of 5.11%, is at 1.43. The Calmar Ratio, which is the ratio of the average return over the maximum drawdown, is at 1.20. The calculation of the model for US treasury bonds took 5.24 hours per CPU core to complete at our central computation workstations, which are a group of powerful computers that perform statistical computation continuously 24 hours day and 7 days a week to produce real-time trading signals for US treasury bonds.
Our current model result suggests that the market is likely to remain weak for the foreseeable future, with the risks to the downside. As a result, we think that challenging times for the market will continue. The table below shows selected drivers that have significant recent updates. They are among the large macro database on which we perform statistical analysis to project future price trends and develop investment views. We do not rely only on any single factor to model our investments. Instead, the cross relationships of all the factors and time series are researched back over many market cycles in both periods of secular bullish and bearish trends. The goal of our algorithm is to identify profitable buy and sell opportunities and optimize the risk/return profile for US treasury bonds.
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