Staff Report, Federal Reserve Bank of New York 657
A vast literature reports excess returns to momentum strategies across many financial asset classes. However, no study examines trading rules based on price history along individual government-bond term structures - that is, with respect to duration buckets across the curve - as opposed to across sovereign markets or individual term structures as a whole over time. Under duration-neutral and long-only constraints as well as low trading costs, this paper reports excess annualized returns of up to 120 basis points and information ratios as high as 0.79 using U.S. Treasury total return data from December 1996 through July 2013. Given a corresponding long-short strategy with no absolute duration risk, excess returns and information ratios are up to 207 basis points and 1.01, respectively. Unlike momentum strategies in some other asset classes, the excess return distributions are positively skewed, and momentum loads, if in any way, favorably on broad risk factors. Returns correlate to a degree with portfolios based on instantaneous forward term premium estimates, in turn derived from a set of Gaussian arbitrage-free affine term structure models. However, substantial variance remains unexplained, the betas are less than one, and the alphas are meaningfully positive. A caveat is that underlying behavioral explanations for momentum are lacking in the context of the U.S. Treasury market.