Government Bond Funds Research Articles

The market timing ability of bond mutual funds

We apply the nonparametric methodology of Jiang (Journal of Empirical Finance 10:399–425, 2003) to examine whether bond mutual funds can time the bond market by adjusting their portfolios' market exposure based on anticipated market movement. This approach offers several advantages over the widely used regression-based tests such as Treynor and Mazuy (Harvard Business Review 44(4):131–136, 1966) and Henriksson and Merton (The Journal of Business 54(4):513–533, 1981). In a comprehensive study covering the USA, UK, and China, we find some evidence of positive market timing of bond funds at the individual fund level. On average, bond funds show neutral to slightly negative market timing abilities. After controlling for public information, we find that a smaller number of bond funds successfully time the market based on private timing signals. In terms of categories, we find strong evidence of positive market timing for Government bond funds as a group, consistent with the findings of Huang and Wang (Management Science 60:2091–2109, 2014).

Towards a dead end? EMU bond market exposure and manager performance

Using factor models we empirically investigate the performance of European Monetary Union (EMU) bond managers. We find that (1) alpha is time varying, (2) bond managers exhibit alpha in the short run as opposed to long-term prior to the Global Financial Crisis (GFC), and (3) bond fund alpha is associated with government bond funds and funds with heavy exposure to government bonds. Our factor models do not detect alpha in corporate and high-yield bond funds on average. We observe that alpha was much higher in the period prior to the GFC that began in 2008. The number of funds in our sample generating alpha dropped significantly after that crisis and remained very low from 2008 to 2017 as EMU markets recovered. We apply three models to evaluate EMU bond fund manager alpha. We use the two bond-market related Fama-French factors – term and default. In addition, we use the three equity market-related Fama-French factors – size, value, and market – together with the momentum factor. We find evidence that the bond market-related Fama-French factors are significant for the EMU bond funds in our sample, but the equity market-related Fama-French factors are not. By applying factor analysis to the returns of EMU bond funds, we (1) identify the economic drivers of EMU bond market returns and (2) show the performance of bond portfolio managers regarding alpha prior to the GFC and explain the possible lack of alpha after the GFC.

Risk-taking and performance of government bond mutual funds

This paper investigates the risk exposures of government bond mutual funds and how risk-taking behavior affects fund performance. Government bond mutual funds often outperform their respective benchmark bond indexes before but not after adjusting for bond market risk factors. We show that the risk-taking behavior of fund managers helps to explain the different performances of government bond funds with and without controlling for the risk factors. Our results suggest that risk-taking leads to higher returns relative to benchmarks in normal risk periods but lower returns in high risk periods, suggesting that fund managers consistently take risky bets in fund management. We further show that the risk-taking of government bond funds is persistent and that investors typically have no ability to differentiate between the skill and risk components of fund performance. These findings suggest why fund managers have incentives to take consistently risky positions.

What Can Macro-Active Bond Funds Tell Us About Monetary Policy Changes?

We document significant outperformance by government bond funds on important macro announcement days such as FOMC and GDP. Attributing the macro-day alpha to fund managers' macro-timing skills, we provide evidence that fund managers do actively trade on their predictions of macro news, their ability to time the level factor is positive on both FOMC and GDP announcements and they can time the slope factor on GDP announcements, and their correct macro-day prediction does lead to higher macro-day alpha. Exploring its variation, we find the macro-day alpha to be larger during times of high macro disagreement and macro surprise, and stronger for more active funds with larger idiosyncratic volatility. Revealing their macro activeness, such active funds suffered the largest losses on the FOMC day of September 16, 2008, when, counter to their prediction, the Fed kept the rate unchanged despite the Lehman default. Finally, we find the macro-day outperformance to be persistent – past macro-day outperformers continue to outperform on future macro days.

Terrorist attacks and investor risk preference: Evidence from mutual fund flows

Using a comprehensive list of terrorist attacks over three decades, we find that aggregate investor risk aversion inversely relates to terrorist activity in the United States. A one standard deviation increase in the number of attacks each month leads to a $75.09 million drop in aggregate flows to equity funds and a $56.81 million increase to government bond funds. Tests on alternative channels further suggest that the shift in aggregate risk aversion is driven mainly by an emotional shock rather than changes in wealth or the outside environment. We also investigate possible alternate explanations for reduced flows to risky assets. Our evidence is consistent with a fear-induced increase in aggregate risk aversion.

The role of active management and asset allocation policy on government and corporate bond fund returns

The role of asset allocation policy and active management on equity mutual fund returns has been a popular research topic, while there is almost no literature on the subject covering bond funds. We check sources of performance for Israeli corporate and government bond funds, which together account for above 70% of the Israeli mutual fund market, using a unique monthly database of approximately 10-years. Our results reveal that active management is far more important than policy for corporate bond fund returns, which is mainly attributable to managers' security selection skills. The reverse is true for government bond funds and strategic long term policies account for a larger part of excess market return variability. Furthermore, if we take into account management fees, government bond funds lose from active management. The greater heterogeneity of investments open to corporate bond funds is a possible explanation for the difference in results.

Bond Fund Performance: Does Management Activity Pay?

Why are investors still pouring money into active funds despite numerous findings of underperformance and growing supply of low-cost passive alternatives? Recent equity fund studies explain this behavior with a positive activity-performance relation. This study is the first consistently analyzing the activity-performance relation in corporate and government bond funds since the 1980s. Contrasting equity funds, bond fund performance negatively relates to higher activity, especially to timing. Selection activity was positively related to performance only during the 2000s but is since then negatively related. Thus, higher activity does not pay for bond funds! Digging deeper into the sources of the relation for corporate bond funds reveals that intensive derivative use, long derivatives, larger size, higher fees, lower flow risk and a non-fundamental investment approach signal a less negative relation. For government bond funds, the results suggest that management ability is generally lower than in corporate bond funds.

Optimal allocation of government bond funds through the business cycle. Is money smart?

We characterize the optimal portfolio decision of an investor who maximizes the conditional expected utility of the return on his or her portfolio, given an investment opportunity set consisting of a U.S. sovereign bond mutual fund and its benchmark. Our results show that, on average, the investor should overweight U.S. government bond funds during recession periods when the “level” factor of interest and the output gap are low and the “curvature” factor of the U.S. yield curve, investor sentiment and the VIX are high, these being related to high U.S. bond risk premia. Important differences in optimal portfolio performance measures across bond fund managers through the business cycle have a great impact on the investor's welfare. However, we find almost no evidence that funds that receive more money subsequently beat the market.

Using TOPSIS for assessing the sustainability of government bond funds

The aim of this paper is to provide a methodology to assess the sustainability of investments in sovereign bonds using a technique for order preference by similarity to the ideal solution (TOPSIS). TOPSIS is a multi-criteria decision making technique used to rank a finite set of alternatives based on the minimization of distance from an ideal point and the maximization of distance from an anti-ideal point. The proposal presented herein can be a potential solution to the research works raised with respect to the difficulty of finding a unified measurement of the sustainability performance of investments in order to support investor decision-making process. The assessment presented is according to both the most frequently used sustainability indicators and the most interesting concerns for a particular investor. The Adjusted Net Saving (ANS), the Ecological Footprint (ECF), the Environmental Performance Index (EPI) and the Human Development Index (HDI) have been used in this paper. Our approach has been applied for evaluating government fixed income funds domiciled in three European countries: France, Italy and the Netherlands. In addition, the developed approach is incorporated in a compromise model for portfolio selection of government bond funds.

Timing Ability of Government Bond Fund Managers: Evidence from Portfolio Holdings

This study examines the ability of government bond fund managers to time the bond market, based on their monthly or quarterly holdings of Treasury securities during the period 1997-2006. We nd that, on average, government bond funds exhibit signi cantly positive timing ability at the one-month horizon, under an unconditional holdings-based timing measure. However, our results indicate that managers' actions based on public information can explain the documented positive timing ability namely, the average government bond fund has neutral or even slightly negative conditional market-timing ability once public information is controlled for. Nonetheless, we nd evidence that fund managers specializing in Treasury securities can better interpret public information than general government bond fund managers do.

Damage Awards Using Intermediate Term Government Bond Funds vs. U.S. Treasuries Ladder: Tradeoffs in Theory and Practice

Abstract Valuing damage awards for personal injury or wrongful death requires the application of finance theory to achieve a practical result. Methods for discounting future earnings losses fall into two major categories: Current market rates, which offer greater objectivity, and historical rates, which theoretically offer greater stability of results by averaging away the effect of often volatile “current” market conditions. The purpose of this paper is to provide a unique ex post comparison of damage awards using distinctive current and historical rates methods that highlight the inherent differences between the two major discounting alternatives. Current market rates methods are represented by a Treasury bond ladder with no instrument rollover, using initial market rates for both discounting and investing damage awards. Historical rates methods are represented by intermediate term government bonds; historical average five-year Treasury yields are used for discounting the damage award, with annual bond rollover required afterwards to maintain the award investment in comparable instruments, creating realized total returns from investing. These alternative methods are compared, ex ante in terms of the present value of the awards, and also ex post, in terms of how well each method's award, based on the same projected lost earnings, is able to support paydowns based on actual lost earnings. Key findings include: (a) both methods result in widely varying lump sum awards; (b) the idea that historical rates offer greater stability of results over time is empirically unsupportable; (c) that a good measure of methodological accuracy is the relative variance in award present values observed by first discounting and then subsequently investing under each method using the same instruments; (d) that different economic conditions greatly affect the relative ex post accuracy of each method; and (e) that neither method is very accurate in projecting present value of earnings losses upon ex post analysis.

A comparison of corporate versus government bond funds

We examine four separate classifications (high quality corporate, general corporate, government Treasury, and general government) of investment grade bond funds over the 1994–2009 period. We verify that distinct differences exist in investment styles across the classifications. We also document significant differences in performance as corporate funds outperform government funds by a risk adjusted average of 8 to 53 basis points on an annual basis depending on the model used. The performance differences are not strictly a function of expenses and are robust to alternative evaluation metrics. An examination of cash flows to the funds indicates that investment dollars are driven by the differences in risk adjusted performance.

The Environmental Performance of Dutch Government Bond Funds

We investigate the implications of using different indicators to assess the sustainability performance of investment funds. In particular, we look into the environmental performance of Dutch government bond funds. We find that it does matter a lot which particular indicator is used. This suggests that funds should be very transparent and straightforward about their non-financial performance. We argue that basically they have three options. First, the industry comes up with a benchmark against which the responsibility of their investments is measured and reported by all funds. Second, the funds make very clear and transparent which particular aspects of sustainability they specifically target and how they keep score. Third, the dashboard approach where the funds report their performance on a well-defined set of indicators.

Timing Ability of Government Bond Fund Managers: Evidence from Portfolio Holdings

This study examines the ability of government bond fund managers to time the bond market, based on their monthly or quarterly holdings of Treasury securities during the 1997–2006 period. We find that, on average, government bond funds exhibit significantly positive timing ability at the one-month horizon under an unconditional holdings-based timing measure. However, our results indicate that managers' actions based on public information can explain the documented positive timing ability—namely, the average government bond fund has neutral or even slightly negative conditional market timing ability once public information is controlled for. Nonetheless, we find evidence that fund managers specializing in Treasury securities can better interpret public information than general government bond fund managers do. This paper was accepted by Wei Xiong, finance.

Corporate and Government Bond Funds: An Analysis of Investment Style, Performance, and Cash Flows

We examine four separate classifications (high quality corporate, general corporate, government Treasury, and general government) of investment grade bond funds over the 1994-2004 period. We verify that distinct differences exist in investment styles across the classifications. We also document significant differences in performance as corporate funds outperform government funds on a risk adjusted basis. The performance results are robust to alternative evaluation metrics. An examination of cash flows to the funds indicates that bond fund investors are aware of the performance difference and have directed their investment dollars accordingly.

The performance of investment grade corporate bond funds: evidence from the European market

This paper examines the risk-adjusted performance of mutual funds offered in Germany which exclusively invest in the ‘rather new’ capital market segment of euro-denominated investment grade corporate bonds. The funds are evaluated employing a single-index model and several multi-index and asset-class-factor models. In contrast to earlier studies dealing with (government) bond funds, we account for the specific risk and return characteristics of investment grade corporate bonds and use both rating-based indices and maturity-based indices, respectively, in our multi-factor models. In line with earlier studies, we find evidence that corporate bond funds, on average, under-perform the benchmark portfolios. Moreover, there is not a single fund exhibiting a significantly positive performance. These results are robust to the different models. Finally, we examine the driving factors behind fund performance. As well as examining the influence of several fund characteristics, particularly fund age, asset value under management and management fee, we investigate the impact of investment style on the funds’ risk-adjusted performance. We find indications that funds showing lower exposure to BBB-rated bonds, older funds, and funds charging lower fees attain higher risk-adjusted performance.

Evaluating Government Bond Fund Performance with Stochastic Discount Factors

This article shows how to evaluate the performance of managed portfolios using stochastic discount factors (SDFs) from continuous-time term structure models. These models imply empirical factors that include time averages of the underlying state variables. The approach addresses a performance measurement bias, described by Goetzmann, Ingersoll, and Ivkovic (2000) and Ferson and Khang (2002), arising because fund managers may trade within the return measurement interval or hold positions in replicable options. The empirical factors contribute explanatory power in factor model regressions and reduce model pricing errors. We illustrate the approach on US government bond funds during 1986–2000.

Evaluating Bond Fund Sector Timing Skill

Reported portfolio data indicate that bond fund managers engage in sector timing behavior. I use simulation procedures to examine the ability of various versions of the Treynor and Mazuy (1966) timing specification to detect positive sector timing skill. Results indicate that the models are unable to detect timing ability at reasonable skill levels for the majority of managers. Alternative measures which compare actual fund returns to the returns from passive strategies using the previous period's sector weights are better able to detect positive ability at reasonable skill levels. When applied to a sample of general government bond funds, these measures indicate managers may possess positive sector timing ability.

An Empirical Analysis of Stock and Bond Market Liquidity

This article explores cross-market liquidity dynamics by estimating a vector autoregressive model for liquidity (bid-ask spread and depth, returns, volatility, and order flow in the stock and Treasury bond markets). Innovations to stock and bond market liquidity and volatility are significantly correlated, implying that common factors drive liquidity and volatility in these markets. Volatility shocks are informative in predicting shifts in liquidity. During crisis periods, monetary expansions are associated with increased liquidity. Moreover, money flows to government bond funds forecast bond market liquidity. The results establish a link between macro liquidity, or money flows, and micro or transactions liquidity. A number of important theorems in finance rely on the ability of investors to trade any amount of a security without affecting the price. However, there exist several frictions,1 such as trading costs, short sale restrictions, and circuit breakers, that impact price formation. The influence of market imperfections on security pricing has long been recognized. Liquidity, in particular, has attracted a lot of attention from traders, regulators,

Evaluating Government Bond Fund Performance with Stochastic Discount Factors

This paper evaluates the performance of government bond mutual funds with stochastic discount factors from continuous-time term structure models. The approach addresses the interim trading bias described by Goetzmann, Ingersoll and Ivkovic (2000) and Ferson and Khang (2002). It replaces the ad hoc selection of empirical factors and instruments with variables prescribed by theory. Time-aggregation of the models for discrete returns generates empirical factors that contribute explanatory power to the models, and may be useful in other settings. We provide the first conditional performance evaluation for US fixed income mutual funds. During 1986-2000 most government bond funds returned less on average than passive benchmarks that don't pay expenses, but not for all states of the term structure. The abnormal returns are reduced, and with a few interesting exceptions become insignificant, when we adjust for risk using the stochastic discount factors from term structure models.