Global curve carry strategies have strong potential for excess returns above bond benchmarks, a research paper from Robeco executives published by the CFA Institute finds.
In the paper, “Carry Investing on the Yield Curve,” the four Robeco authors sorted the government bonds of 13 developed markets into six maturity ranges, beginning with short-term bonds (one- to three-year) and ending with long-term bonds (15 or more years).
A government bond's "carry" is the return on investment if there is no change to the yield curve. Rather than basing the research on individual bonds, as has been done in the past, the strategy employed for the paper buys multiple bonds within the maturity ranges, buying long bonds with a high carry and selling low carry maturities in each country.
The authors call the application of this same investment process across the 13 developed markets a "global carry factor."
According to a summary of the paper, global carry "can be considered a new bond factor since its excess returns are in addition to known and widely used bond factors."
The paper gave an example of the U.S. bond return broken into carry and yield changes. From January 1985 through October 2018, yields from the first five maturity ranges declined about 0.25% per year, showing that if yields had not changed over this period, bond returns would have been dependent solely on carry. (These five maturity ranges went from the shortest — one year to three years — to the the second-longest in the study, 10 years to 15 years.)
"In the long run, the entire excess bond return is carry; hence, carry can be viewed as the expected bond risk premium," the paper said.
The paper examined 13 markets in the J.P. Morgan Global Government Bond index: Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan, the Netherlands, Spain, Sweden, the U.K. and the U.S.
The authors of the paper, all employees of Robeco and based in Rotterdam, the Netherlands, are Paul Beekhuizen, technical portfolio manager, fixed income; Johan Duyvesteyn, portfolio manager and researcher, quant allocation; Martin Martens, head of quant allocation research; and Casper Zomerdijk, researcher, quant allocation.