Beating The Bond Market (Part III)

In Part I here, I highlighted a 4-bond index portfolio (convertible bonds, high yield corporate bonds, long-term treasury and intermediate-term treasury) that:

*Gained almost as well as long-term treasuries

*Did so with a lot less volatility

*Has the potential to outperform long-term bonds if rates ever do rise again

In Part II here , I added seasonality to the mix, which:

*Involved holding only 2 of the 4 indexes each month

*Increased total return by roughly 3.5 times.

In Part III, we will go “out there” even further and – once again using seasonality – will hold only one index per month.

In the simplest terms possible, going from a buy/hold/rebalance approach using four bonds indexes to a hold one fund per month based on seasonality approach, moves one significantly higher up the “potential risks” and “potential rewards” spectrum.

The four indexes included in our testing are:*Bloomberg Barclay’s Convertible Bond Index*Bloomberg Barclays (LON:BARC) High Yield Very Liquid Index*Bloomberg Barclays Treasury Long Index*Bloomberg Barclay’s Intermediate IndexETFs that either track these indexes (or something very similar) are:Convertibles: (NYSE:CWB) – SPDR Barclays Capital Convertible Bond ETF (tracks the Barclays Capital U.S. Convertible Bond >$500MM Index)High Yield: (NYSE:JNK) – SPDR Barclays High Yield Bond ETF (tracks the Barclays Capital High Yield Very Liquid Index) OR (NYSE:HYG) – iShares iBoxx $ High Yield Corporate Bond ETF (tracks the iBoxx $ Liquid High Yield Index)Long-Term Treasury: (NASDAQ:TLT) – iShares 20+ Year Treasury Bond ETF (tracks the Barclays Capital U.S. 20+ Year Treasury Bond Index)Intermediate-Term Treasury: (NASDAQ:IEI) – iShares 3-7 Year Treasury Bond ETF (tracks the Barclays Capital U.S. 3-7 Year Treasury Bond Index)For testing purposes, we are going to use the four Bloomberg Indexes listed as they provide a longer period of test data.

Figure 1 – Jay’s 1-Bond Index per Month Calendar

As you can see, this “strategy” involves 4 trades a year.

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h3 The Results/h3

Figure 2 displays the hypothetical growth of $1,000 invested using the “One index at a time System” versus buying and holding (and rebalancing once a year) all four indexes.Figure 2 – Growth of $1,000 invested using Jay’s 1-Bond Index per Month Strategy versus Buy/Hold/Rebalance All 4 Indexes; 1986-2019Figure 3 displays the relevant comparative figuresFigure 3 – Jay’s 1-Bond Index per Month Strategy versus Buy/Hold/ Rebalance; 1986-2019From 12/31/1986 through 8/31/2019 the 1 Index per month Seasonal System gained +7,005% versus +1,077% (6.50 times as much) as the buy/hold and rebalance method.

h3 Summary/h3

So, is this 1 -Bond Index per month Seasonal Bond System the “be all, end all” of bond investing? Probably not. Anytime you go from trading a diversified portfolio of anything, to just one security at a time you introduce a potential level of risk that can clobber a portfolio when things go wrong “that one time.”

At the same time, a return that is 6.5 times a simple buy-and-hold approach may warrant some consideration as long as one comprehends the potential risks involved.

Written By: Jay Kaeppel