Futures Momentum Model Signals – US Bond Models Aiming for Higher Yields

• Bond models aim for higher yields, with US bonds receiving the most ‘sell’ signals.
• All equity lookback model signals are ‘buy’.
• The best performing bond and equity models over the past three months have been the three-month lookback for US long bonds (1.7%) and the 12-month lookback model for DAX (9%).

2022 has started with a surge in bond yields. 10-year Treasury yields have climbed to their highest levels since April. Fed hawkishness is the main culprit behind these moves. Recently released minutes from the December FOMC suggest the Fed may even consider reducing the size of its balance sheet this year. Equities have declined on the rise in yields. Meanwhile, markets appear to be shrugging off Omicron risks. Elsewhere, oil prices broke above $80, unphased by planned OPEC+ supply increases. On this backdrop, bond models see an increase in ‘sell’ signals while equity models turn to all ‘buy’ signals.

Latest Signals

Three changes to our bond lookback model signals (Chart and Table 1). Signals flip to ‘sell’ for the three-month lookback for US long bonds, and the 12-month lookback for JGBs. Meanwhile, the three-month lookback for UK long gilts flips ‘buy’. Bond models are net ‘sell’ (Chart 1).

One signal change. The three-month lookback model for Nikkei flips to signal ‘buy’ (Table 1). All lookback model signals for the S&P500, Nikkei, DAX, and FTSE-100 are ‘buy’ (Chart 1).

Best Performing Models

Looking at the performance of the best models over the past three months, we find the following:

• Bonds: The best-performing bond model is the three-month lookback for the US 5-year. It has delivered 1.7% return and is currently signalling a ‘sell’ (Table 1, Chart 2).
• Equities: The 12-month lookback model for DAX delivered 9% over the past three months. It currently signals ‘buy’ (Table 1, Chart 3).

*The basic strategy is to use returns (lookback windows) to give buy/sell signals. So, if the US stocks are up over the past 3 months, you buy, otherwise you sell (note I use excess returns).

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

Ben Ford is a Researcher at Macro Hive. Ben studied BSc Financial Mathematics at Cardiff University and MSc Finance at Cass Business School, his dissertations were on the tails of GARCH volatility models, and foreign exchange investment strategies during crises, respectively.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)