Trend-following is one of the simplest and easiest ways to prevent deep drawdowns and is often used for trading commodities, currencies and equities. Can they be used to trade bonds?
No.
Read: Trend-following Bonds
Bonds are a different beast in that they have a “valuation” ceiling. Yields have a (rational) floor of zero and, at maturity, par is all that the owner can hope for. This keeps a tight lid on irrationality. So, yeah, think twice before drawing lines.
Markets this Week
What happened on futures expiry day?
Bonds got shellacked. Gold got crushed. Higher for longer…
More here: country ETFs, fixed income, currencies and commodities.
Links
Research
New Mauboussin paper: Trading Stages in the Company Life Cycle (pdf)
Risk Aversion and Dating: 45% of men age 18-25 have never approached a woman in person. Young men are simply not trying.
Transaction Costs and Capacity of Systematic Corporate Bond Strategies
As the size of the bond fund increases, the market impact part of transaction costs drives net return down to zero. We find that high-turnover strategies that exploit reversal and illiquidity signals reach capacity fast.
America: Monetary Policy and Innovation
Monetary policy has a substantial impact on innovation activities. After a tightening shock of 100 basis points, research and development (R&D) spending declines by about 1 to 3 percent and venture capital (VC) investment declines by about 25 percent in the following 1 to 3 years. Patenting in important technologies, as well as a patent-based aggregate innovation index, declines by up to 9 percent in the following 2 to 4 years.
Europe: Ultra-Low Interest Rates, Optimal Risk, and the Rise of Zombies
In response to interest rate cuts to ultra-low levels, managers who care primarily about career stability significantly reduce risk, while profit-maximizing managers invest in riskier and thus more profitable projects. The former dominates. Interest rate cuts lead to an economically and statistically significant increase in the asset-weighted zombie share. The reduction in corporate risk appetite accounts for a significant part of this increase.
Economy & Investing
The average ratio of developed market debt to GDP has risen to around 100%, up substantially from less than 70% before the GFC in 2008.
Nearly everyone should just buy a cheap global equities fund for diversification and a locally denominated corporate bond fund to minimise FX volatility. Government bonds are only useful for managing drawdown requirements, so they have no place in your long-term strategy. Commodities don’t generate income so it’s probably not worth bothering with them either.
Jan Loeys, JPMorgan (ft)
India's market regulator is examining a proposal from the country's top exchange to extend trading hours for index derivatives. (reuters)
India will set carbon emission reduction targets for four fossil fuel dependent sectors - petrochemicals, iron and steel, cement and pulp and paper, start carbon trading from 2025 (reuters)
India is considering spending 600 billion rupees ($7.2 billion) to provide subsidised loans for small urban housing over the next five years. The scheme will offer an annual interest subsidy of between 3-6.5% on up to 0.9 million rupees of the loan amount. (reuters)
How thinking in a foreign language improves decision-making (theguardian)
Odds & Ends
All content that wins on the internet has to be exceptional at something. But, because it is damn near impossible to consistently produce extremely exceptional content, sensationalism usually wins.