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An Intermarket Approach to Tactical Risk Rotation: Using the Signaling Power of Treasuries to Generate Alpha and Enhance Asset Allocation

2014 Wagner Award, 3rd Place

18 Pages Posted: 1 May 2014  

Michael A. Gayed

Pension Partners, LLC

Charles V. Bilello

Pension Partners, LLC

Date Written: February 28, 2014

Abstract

Numerous academic studies have shown that asset allocation is the single most important determinant of portfolio returns. We accept this premise but note that an optimal asset allocation strategy must still be determined based on dynamic conditions. Using the principles of intermarket analysis and the relationship between the total return of the 10-year Treasury and the 30-year Treasury, we develop one such strategy. We find that an active strategy that uses the signaling power of these Treasury bonds to position into either the stock market or Treasuries can be used to outperform a buy and hold stock portfolio on an absolute and risk-adjusted basis. We also find that the signaling power of Treasuries can be used to enhance asset allocation decisions and traditional rebalancing. 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.

Keywords: Intermarket Analysis, Stocks, Tactical Risk, Trading, Market, Momentum, Rotation, Volatility, Bonds, Fixed Income, Treasuries, Equities, Rebalancing, Quantitative, Efficient Markets, Hedge, Asset Allocation

JEL Classification: C00, C10, C50, G00, G11

Suggested Citation

Gayed, Michael A. and Bilello, Charles V., An Intermarket Approach to Tactical Risk Rotation: Using the Signaling Power of Treasuries to Generate Alpha and Enhance Asset Allocation (February 28, 2014). 2014 Wagner Award, 3rd Place. Available at SSRN: https://ssrn.com/abstract=2431022 or http://dx.doi.org/10.2139/ssrn.2431022

Michael A. Gayed (Contact Author)

Pension Partners, LLC ( email )

430 West 14th Street
Suite 505
New York, NY 10014
United States
2122555000 (Phone)

HOME PAGE: http://www.pensionpartners.com

Charles V. Bilello

Pension Partners, LLC ( email )

430 West 14th Street
Suite 505
New York, NY 10014
United States
212-255-5000 (Phone)

HOME PAGE: http://www.pensionpartners.com

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