Sell Signals For Bonds

Selling pressure picked up in the US bond market this week, which triggered sell signals for two fixed-income ETFs in our Global Managed Risk I and II proprietary strategies. At the close of trading today (Friday, Aug. 14), iShares iBoxx $ Investment Grade Corporate Bond (LQD) and iShares 7-10 Year Treasury Bond (IEF) shifted to a risk-off posture.

The trigger for the sell signal: each fund posted drawdowns that, for each of the last two days of this week, dipped under the 50th percentile (based on a rolling 50-day window). As a result, the current allocation for the funds will be moved to a “safe” asset at or near the open of trading on Monday. The “safe” asset for GMR I is iShares 20+ Year Treasury Bond (TLT) while II’s fund haven is the far more conservative iShares Short Treasury Bond (SHV).

Here’s how each bond ETF on the sell list ended the week:

As a recap, Global Managed Risk I and II are run with the following opportunity set and target weights:

The target weights are used to rebalance each asset bucket for I and II every Dec. 31 – the strategic aspect of the strategies. Meanwhile, today’s tactical sell signals, as noted, were triggered when the respective drawdowns exceeded the sell threshold. This rule is applied to each risk asset independently.

The goal is to nip drawdowns in the bud before they can unleash substantial damage. But nothing’s perfect and so the potential exists for a fair amount of turnover and false signals. As always with real-time portfolio adjustments, it remains to be seen if today’s risk-off signals prove to be worthwhile. The backfilled history of the strategies, however, looks encouraging on a portfolio-wide basis (see table below).

Meantime, here’s a recap of the signals for all the funds in Global Managed Risk I and II for the past six weeks (1=sell, 0=buy/hold).

Finally, here’s a return and risk update of the two proprietary strategies (plus a minimum volatility strategy that uses the funds in in the table above), along with our standard benchmarks (and definitions).

US.60.40: US stock/bond portfolio, rebalanced every Dec. 31

GMI: an unmanaged global portfolio that holds the major asset classes in market-value weights

G.B4: a twist on GMI that reduces holdings to four broadly defined ETFs that target global exposure to stocks, bonds, real estate and commodities. Weights: 60% stocks, 30% bonds, 5% real estate and 5% commodities. The portfolio is rebalanced every Dec. 31.

G.B15: an expanded version of G.B4 via 15 ETFs that slice and dice the world’s major asset classes into a more granular portfolio design. The overall allocation still matches G.B4: 60% stocks, 30% bonds, 5% real estate shares and 5% commodities.