Bond Momentum?
Momentum investing with equities is a fairly straightforward concept, but such an approach is harder to replicate with bonds.
“There are a lot more CUSIPs [i.e., individual securities] with bonds, so it’s a market that is a lot harder to track,” says Invesco’s Waldner. As a result, fixed-income-focused factor funds shift their assets toward entire bond classes such as short-term bonds, high-yield bonds and emerging-market bonds.
Momentum-focused bond funds have had to navigate tricky waters, says Bruno. In the past 12 months, the Fed has pivoted from a course of rate hikes to an increasingly likely path of interest rate cuts. “[Bond] momentum doesn’t work well during inflection points, such as when the Fed changes course on policy,” he says.
His firm’s IQ Enhanced Core Bond U.S. ETF (AGGE) uses a momentum investing strategy that seeks to capitalize on the persistence of ongoing market trends, according to the fund literature. Bruno says the approach worked well in the early years after the fund was launched in May 2016, but has struggled during the more recent period of bond market volatility. As a result, the fund’s three-year annualized return of 1.12% has trailed the benchmark Bloomberg Barclays U.S. Aggregate Bond Index by more than a percentage point per year.
The rapid shifts in interest rate policy over the past year indicate that the once-boring bond market may be poised to remain in a volatile state for the foreseeable future. A cloudy outlook for the direction of interest rates, stunningly large government budget deficits around the globe and an unprecedented level of executive branch jawboning about central bank policy means that the decade ahead for bonds could be quite different from the past decade. Applying value, quality and momentum factors to fixed-income sleeves may help to smooth out the peaks and valleys.