Investors with long Treasury allocations should consider whether the following enhancements may be beneficial to their portfolio.

1.  Switch out physical Treasury bonds for swaps or futures to better pinpoint individual points on the yield curve (and consider leverage if needed).

2.  Use swaps to target the area of the yield curve with the best hedging properties and highest Sharpe ratio, generally the belly of the curve (about five years), while making adjustments based on carry, roll-down, and the phase of the business cycle.

Josh Davis is a managing director, portfolio manager and head of client analytics at PIMCO. Cristian Fuenzalida is a quantitative research analyst at PIMCO. Sasha Talcott is a senior vice president and account manager at PIMCO.

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