Yield Curve Dynamics - Exploring Fundamental Factor Sensitivities

Abstract: Factor investing has gained popularity in recent decades, but while ample research has been conducted in asset classes such as equities and currencies, comparatively less attention has been devoted to the potential of investing in government bonds. This study explores fundamental factor sensitivities on the yield curve spread prior to and after 2018 making the last five years, that are coined by increased volatility in expected returns for government bonds, volatile growth developments, and heightened inflation, a true out-of-sample period to previous research. In line with existing literature, the efficacy of investing based on momentum, carry, and value is corroborated, while additionally showing that futures style portfolios can outperform the market in a more volatile macroeconomic backdrop. This study's results further highlight that including macro factors in a portfolio strategy proves to be beneficial to the investor.