Enhancing Risk-Adjusted Return Using Time Series Momentum in Sovereign Bonds

Abstract

This article studies an actively managed bond strategy based on time series momentum in sovereign bond markets. The author assesses the performance of an active strategy and investigates diversification benefits in comparison with a passive buy-and-hold strategy when each strategy is combined with international equity indexes. The analysis provides evidence that the active strategy offers higher expected returns without increasing return volatility. Importantly, and in comparison with the passive strategy, the active strategy results in both significant return and diversification enhancements when combined with international equity indexes. Therefore, the author suggests that his active momentum strategy can serve fund managers as an alternative to common long-only passive bond strategies to enhance the riskadjusted return of a combined portfolio of sovereign bonds and equities.