Right?
From the Federal Reserve Bank of New York's Liberty Street Economics blog:
Decades of research have produced a library on the “momentum” anomaly in markets. Momentum refers to the tendency for financial assets with the best prior returns to continue to produce superior results, at least for a time. Previous findings—regarding individual U.S. stocks as well as foreign shares, broad equity indexes, commodities, and currencies—contradict the common wisdom that markets are efficient. Curiously, even though the market for nominal U.S. Treasury securities is among the deepest and most liquid in the world, no one has rummaged through government bond term structures to find similar strategies that work, no matter what the future general direction of interest rates. Yet my recent staff report describes simple low-cost trading rules that produce positively skewed and sizable excess returns, merely by directing investors to construct portfolios of maturities that have had superior returns. Neither short sales nor exposure to interest rate risk is required.
Just how does the strategy work, and what are the risks? Consider six Barclays Capital total return indexes of the nominal U.S. Treasury market—the one- to three-, three- to five-, five- to seven-, seven- to ten-, ten- to twenty-, and twenty- to thirty-year maturity buckets. Following convention, measurement of momentum along the term structure is based on average historical total returns for each maturity category, and researchers generally calculate those averages from between two through five months ago to two through as many as thirteen months prior. For example, for a five-month window length, the momentum on the twenty- to thirty-year maturity bucket observed for July 2013 refers to the average total return from January 2013 through May 2013, and correspondingly, the twelve-month momentum for July 2013 refers to average returns calculated between June 2012 and May 2013. In turn, the momentum portfolio simply comprises the allocation across the six buckets that has had the greatest return over a given window, under two simple constraints. First, the portfolio weights are bound between zero and one to preclude short sales, and therefore the strategy is fully suitable for long-only investors. Second, the allocation produces the same weighted-average duration as the benchmark. In other words, any anomalous excess return over the index cannot represent compensation for relative exposure to future parallel movements in interest rates.
Excess returns on this long-only strategy suggest a sizable anomaly given all index return data available on durations, market weights, and total returns from Barclays, beginning in December 1996 and ending in July 2013. As the chart below shows, the average annual excess return over the benchmark is about 120 basis points, given a window between two and nine months. The ex post tracking error—the standard deviation of those excess returns in annual terms—is 153 basis points, for a safely statistically significant information ratio, a measure of investor skill, of 0.79....MUCH MORE
