Can Long-Only Investors Use Momentum to Beat the US Treasury Market?

Abstract

The literature on momentum is vast. No previous study, however, has examined trading rules along government bond term structures. Under index-duration-neutral and long-only constraints and with low trading costs, an equally weighted average strategy across 20 look-back windows produces an information ratio of 0.46, given US Treasury total return data from March 1985 through December 2013. Unlike momentum in other asset classes, excess relative returns for this asset class are positively skewed and load favorably on risk metrics. Returns correlate with term premium estimates and yield curve factors, but substantial variance remains unexplained and the alphas are meaningfully positive.