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.
In recent research, we had already found that model performance is stronger in times of rising volatility. We also knew that rising volatility is related to periods with larger yield changes. We then further analyzed the relationship between the model’s performance and market movements.
It turned out that the model performance is stronger in periods with larger yield changes. Performance is lower when bond markets move sideways. The duration model is a market timing model and this behavior is therefore not a surprise: the model can offer most value when markets move meaningfully, either up or down.
We expect the model to continue to benefit from meaningful moves in bond markets. As the Fed is gradually reducing its extraordinary bond market operations, volatility should increase. Large yield changes are expected to occur more often, providing more opportunities for active duration management.
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