Expectations for the fundamental drivers of bonds can be derived from financial market information. In particular, data from both developed and emerging equity markets.
For over 20 years, our duration model, which determines the active duration positioning of our QI Dynamic Duration strategies, has been successfully forecasting returns in the major bond markets using financial market data. Recent research carried out by Robeco showed that incorporating data from both developed and emerging equity markets further improves the model’s ability to derive economic growth expectations and forecast bond returns. This enhancement was recently implemented.
Over the past decades, emerging countries have seen their influence on the global economy increase dramatically. Not only do they now contribute more to growth, they also represent an increasingly important export destination for developed economies. Over time, emerging countries have also become major holders of government bonds issued by their developed counterparts. Given this increasingly important role of emerging economies, it seemed logical to investigate the added value of using information from emerging equity markets in our duration model.
Because of its forward-looking nature, to derive expectations for the fundamental drivers of bond markets, such as economic growth, inflation and monetary policy the model relies on financial market data, rather than official economic statistics such as GDP growth. Such statistics are, by definition, backward-looking, published with a delay and prone to revisions. But until now, the financial market data the model had been using came solely from developed equity markets.
Our study confirmed that strong equity market performance is a good indicator for improving growth expectations or reduced uncertainty about growth prospects. All else being equal, this should lead to negative bond market returns. Conversely, weaker equity market performance usually signals deteriorating economic prospects, pointing to positive bond returns.
‘Including information from emerging equity markets adds considerable value’
Moreover, our research analysis showed that the model’s ability to derive growth expectations improves consistently when the returns of emerging equity markets are included. “Including information from emerging equity markets clearly adds considerable value to the model,” says portfolio manager and quant researcher Johan Duyvesteyn.
Indeed, this enhanced approach generates a better and more stable performance. Taking into account information from emerging equity markets to derive growth expectations improves the backtest results for the entire model. This further strengthens Robeco’s Dynamic Duration strategies’ proposition to benefit from periods with declining bond yields while keeping returns protected when yields rise.
“On a daily basis, developed bond market investors may overlook economic data coming from the emerging world and focus on other important issues making headlines, such as monetary decisions from major central banks, for example,” says Duyvesteyn. “And when investors do finally focus on hard global economic growth data, our strategy is already well positioned thanks to our enhanced approach to deriving economic growth expectations.”
Please read this important information before proceeding further. It contains legal and regulatory notices relevant to the information contained on this website.
The information contained in the Website is NOT FOR RETAIL CLIENTS - The information contained in the Website is solely intended for professional investors, defined as investors which (1) qualify as professional clients within the meaning of the Markets in Financial Instruments Directive (MiFID), (2) have requested to be treated as professional clients within the meaning of the MiFID or (3) are authorized to receive such information under any other applicable laws. The value of the investments may fluctuate. Past performance is no guarantee of future results. Investors may not get back the amount originally invested. Neither Robeco Institutional Asset Management B.V. nor any of its affiliates guarantees the performance or the future returns of any investments. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency.
In the UK, Robeco Institutional Asset Management B.V. (“ROBECO”) only markets its funds to institutional clients and professional investors. Private investors seeking information about ROBECO should visit our corporate website www.robeco.com or contact their financial adviser. ROBECO will not be liable for any damages or losses suffered by private investors accessing these areas.
In the UK, ROBECO Funds has marketing approval for the funds listed on this website, all of which are UCITS funds. ROBECO is authorized by the AFM and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request.
Many of the protections provided by the United Kingdom regulatory framework may not apply to investments in ROBECO Funds, including access to the Financial Services Compensation Scheme and the Financial Ombudsman Service. No representation, warranty or undertaking is given as to the accuracy or completeness of the information on this website.
If you are not an institutional client or professional investor you should therefore not proceed. By proceeding please note that we will be treating you as a professional client for regulatory purposes and you agree to be bound by our terms and conditions.