The predictive behavior of Treasuries on equities is a market anomaly that has persisted over time, and has served as an anticipatory gauge of expansionary or contractionary conditions which favor stocks or bonds. Contrary to the Efficient Market Hypothesis, the information provided by relative total return Treasury movement does not appear to be priced in immediately by broad stock market averages, and therefore may be exploitable for active traders and tactical asset allocators.
The theory behind why this strategy works ultimately relates to investor behavior during periods of anticipated stock market volatility and slowing growth/inflation expectations. Because Treasuries are considered a “risk-free” investment from the standpoint of credit worthiness, and longer-duration Treasuries tend to react most favorably during “risk-off” periods, investors tend to position into longer duration bonds in advance of periods of higher volatility. As near-term confidence grows and investors begin to expect a more expansionary environment to follow, intermediate term duration Treasuries tend to outperform their more defensive 30-year counterparts.
Basicamente la regla es:
When the 10-year Treasury total return is greater than the 30-year Treasury total return in the prior month, position into stocks for the following month. When the 10-year Treasury total return is less than the 30-year Treasury total return in the prior month, position into either the 10-year Treasury or 30-year Treasury for the following month.
First, in replicating the signal, the instruments that currently resemble the 10-year Treasury and 30-year Treasury most closely are the iShares 7-10 Year Treasury Bond (IEF) and the iShares 20+ Year Treasury Bond (TLT). From the inception of these ETFs 13 in July 2002, the signal produced from their total returns was similar in 95% of months to the signal generated from the CRSP® data.
Next, in replicating the available instruments, investors could choose from a variety of products.
In the all-in strategy, substitutes for the Fama-French Stock Index include the Vanguard Total Market ETF (VTI), the Vanguard Total Stock Market Index Fund (VTSMX), and any other total U.S. stock market product. Substitutes for the 10-year Treasury note include the iShares 7-10 Year Treasury Bond (IEF), the Vanguard Intermediate Bond Fund (VBIIX), and any other Treasury bond product with an average maturity of close to 10 years. Substitutes for the 30-year Treasury bond include the iShares 20+ Year Treasury Bond (TLT), the Vanguard Long-Term Bond Index Fund (VBLTX), and any other product with an average maturity of close to 30 years.
In the rebalancing strategies, the substitutes for the stock portfolio are the Vanguard Total Market ETF (VTI), the Vanguard Total Stock Market Index Fund (VTSMX), and any other total U.S. stock market product. Substitutes for the Barclays Aggregate Bond Index include the iShares Barclays Aggregate Bond Fund (AGG), the Vanguard Total Bond Market ETF (BND), the Vanguard Total Bond Market Index Fund (VBMFX), and any other total U.S. bond market product.