Strategy: Bond Rotation “Sleep Well”

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    The BRS strategy has toggled its allocation between CWB-JNK and CWB-PCY over the past couple of months. Can you elaborate further on the driver behind the change? I know it is ultimately driven by the algorithm output, but do you think it’s detrimental to make the change? I am cautious of trading costs due to selling JNK to but PCY, and now after a month, I have to pay for the same trading costs to reverse the change. Please advise.



    I enjoy the LI model and have used it now for 18 months.

    I use the BRS, G-C, MYRS, N100 and UIS 3X strategies (with a minimum of 10% allocated to each).

    CWB has been a major holding for most of the time in BRS. I received a letter from the SPDR series trust stating that, as of 10/2/17, the benchmark index name was changed from “BLoomberg Barclays US Convertible Bond Fund >$500MM Index” to “Bloomberg Barclays US Convertible Liquid Bond Index”.

    Will these changes effect how CWB operates?

    Frank Grossmann

    I don’t think this will change anything. The step to define an index based on the fund is just marketing. Index data can be sold and others can build products based on this index. It shows however, that CWB is a very popular and liquid ETF which is in fact good for the Bond Rotation Strategy

    Mark Faust

    Good Morning All,
    With a lot of financial professionals thinking we are at the end of the “Bond Bull Market”, I was wondering where a good strategy might lie to keep the volatility in our portfolios at bay???

    I have been using the BRS in the 20%-30% range, but I am afraid that going forward it might not be the vehicle it once was….



    Michael Puchtler

    Hi guys – I’m a big fan of your service – been using it for over a year with great results and just recently upgraded to QuantTrader. So far so good!

    Question for you – I use BRS as a dynamically allocated hedge in one of my custom strategies. I’ve been reflecting on what might cause that to not work out so well, and the assumed reverse correlation of stocks and bonds immediately comes to mind (namely, if we get a recession / crash of some sort that treasuries will go up). To mitigate this, I was thinking of incorporating some sort of ‘go to cash’ option, and noticed that you used to incorporate $SHY in the BRS but no longer do so. Do you mind sharing your perspective on a ‘go to cash’ option (knowing that $SHY isn’t actually cash) for the BRS, and why it was removed? I understand that the backtested performance might be better with the current 4 BRS ETFs, but the assumed reverse correlation mentioned above makes me a little nervous. Thanks!

    Alexander Horn

    Michael, thanks for the flowers!

    As long as the inverse correlation of the employed bonds to equities hold, it´s actually better to use them as hedge. Using cash means you take “skin-off-the-market”, so probably after a dip have already lost some in equities and will probably loose the re-entry.

    Staying in bonds, you normally will off-set part of the dip – or even gain some money.The only way we still use a cash-component is to set a volatility constraint on portfolio level. You can test your own variants of cash as exit or as volatility constraint using QuantTrader, see here for a free month.


    Not strictly a bond strategy question but perhaps highly related … What would you recommend as an alternative to cash for funds set aside for emergency living expenses ? Cash returns essentially nothing in the USA but is stable-ish, so I am looking for something liquid that preserves the principal fairly well in good and bad markets and also generates a little yield. Thanks.

    Alexander Horn

    Hmm, not an easy question if you’re referring to short term, e.g. <1yr. For current income probably going either dividend stocks (which is not really our main interest) or shorter bonds / munis (also not really our expertise).

    We're rather medium/long term focused, so if your outlook is >1yr (with sufficient cash or income for expenses) then a broad and diversified portfolio of our strategies in my opinion is the best balance between capital growth and withdrawal rate.



    If I am not mistaken , most of the ETFs in the Bond Rotation Strategy mirror low credit rating /junk bonds.
    What is the extent of risk due to this ? e.g. if there a spate of defaults in the JNK constituents, will the ETF tank ?
    ( May be a naive/basic question as I am not familiar with these ETFs) that extent is it really a Sleep Well strategy !!

    Also I read that the overall credit quality has gone down. Does this make this strategy more risky now than in the past ?



    I have been following the BRS strategy for some time and as some of its ETFs have a bearish outlook, I produced an excel spreadsheet including TBF (inverse ETF to TLT) in the rotation. Although my spreadsheet does not replicate the balancing algorithm and just allocates 50/50 to the two best performing ETFs with a lookback period of 90 days, it gives a very good yield curve. Of course this is a simplified model, but bringing TBF into the equation brings a very significant difference.
    Is there any particular reason not to use TBF as one of the rotating ETFs?



    Alexander Horn

    Good morning Miguel,

    here a Screenshot of the BRS strategy including TBF. Adding an outright short bond goes a bit against the philosophy of the strategy. Short bonds are long-term looser as the dividends from interests create a positive bias, again long-term, when the yield curve is expected to go up as currently then it may make sense.

    You can see that there is no big difference in the performance anyhow, so we would rather not include it.

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