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Actively managing a portfolio’s sensitivity to interest rate movements is crucial for the returns on fixed income portfolios, as they are predominantly driven by changes in government bond yields. To forecast yield changes, Robeco developed a quantitative model in the 1990s, which has proven to have very good predictive power.
In the recent-sell-off on global government bond markets, Robeco Lux-o-rente managed to maintain a positive year-to-date return with its active duration positioning. This illustrates the importance of an active investment approach.
Robeco’s quantitative duration model drives the performance of quant duration solutions such as Robeco Lux-o-rente and Robeco Flex-o-rente. We monitor the performance of the model and regularly investigate in which circumstances the model performs well and which conditions are more challenging.
With its quantitative easing programs, the Fed has distorted bond markets, especially by reducing volatility. This has negatively affected the performance of the duration model.
The duration model combines multiple factors. The model is used to predict government bond returns and fully determines the active positions in the funds Robeco Lux-o-rente, Robeco Flex-o-rente and Robeco Emerging Lux-o-rente.The performance of the model is continuously monitored and analyzed to strive for further enhancements. This whitepaper discusses the impact of an enhanced approach on the balance and the robustness of the model.
We analyzed the sensitivity of the duration model's performance to inflation and different financial market regimes. Our conclusions are threefold: (1) the model delivers a strong performance when inflation is high; (2) the model offers protection against rising inflation for bond investors and (3) the model is successful in both bull and bear markets.
Some of the most influential scientific papers on the predictability of bond markets connect theory with the tested predictive power of the variables of Robeco’s duration model. A small sample of academic evidence on the predictability of fixed income markets is discussed in this paper and its link to the model is illustrated.