Abstract
In this article, we undertake a systematic, security-level analysis of momentum and reversal strategies in US Treasuries covering more than 40 years of data. We distinguish between what we call “market” and “self” time-series momentum (reversal) strategies and present an exact identity between these two time-series and the cross-sectional momentum (reversal) strategies. This identity helps us identify the sources of profitability of the various strategies and raises an interesting question regarding the contribution to the profitability of the first and second principal components of yield changes. We find that there exist look-back and investment periods for which momentum <i>time series</i> strategies (both “self” and “market”) give rise to statistically and economically significant positive Sharpe ratios; but we find that after adjusting for duration, the <i>reversal</i> cross-sectional strategy has an even larger Sharpe ratio and is profitable over a wider range of look-back and investment periods. We find an explanation for this finding in the mean-reverting properties of the yield-curve slope. Finally, we discover that the duration-adjusted reversal cross-sectional strategy can be successfully implemented in a long-only fashion.
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