Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
Stock Market DOW Seasonal Trend Analysis - 23rd Mar 19
US Dollar Breakdown on Fed Was Much Worse Than It Looks - 23rd Mar 19
Gold Mid-Tier GDXJ Stocks Fundamentals - 23rd Mar 19
Which Currency Pairs Stand to Benefit from Prevailing Risk Aversion? - 23rd Mar 19
If You Get These 3 Things Right, You’ll Never Have to Worry About Money - 22nd Mar 19
March 2019 Cryptocurrency Technical Analysis - 22nd Mar 19
Turkey Tourist Fakes Market Bargains Haggling Top Tips - 22nd Mar 19
Next Recession: Finding A 48% Yield Amid The Ruins - 22nd Mar 19
Your Future Stock Returns Might Unpleasantly Surprise You - 22nd Mar 19
Fed Acknowledges “Recession Risks”. Run for the Hills! - 22nd Mar 19
Will Bridging Loans Grow in Demand and Usage in 2019? - 22nd Mar 19
Does Fed Know Something Gold Investors Do Not Know? - 21st Mar 19
Gold …Some Confirmations to Watch For - 21st Mar 19
UKIP No Longer About BrExit, Becomes BNP 2.0, Muslim Hate Party - 21st Mar 19
A Message to the Gold Bulls: Relying on the CoT Gives You A False Sense of Security - 20th Mar 19
The Secret to Funding a Green New Deal - 20th Mar 19
Vietnam, Part I: Colonialism and National Liberation - 20th Mar 19
Will the Fed Cut its Interest Rate Forecast, Pushing Gold Higher? - 20th Mar 19
Dow Jones Stock Market Topping Pattern - 20th Mar 19
Gold Stocks Outperform Gold but Not Stocks - 20th Mar 19
Here’s What You’re Not Hearing About the US - China Trade War - 20th Mar 19
US Overdosing on Debt - 19th Mar 19
Looking at the Economic Winter Season Ahead - 19th Mar 19
Will the Stock Market Crash Like 1937? - 19th Mar 19
Stock Market VIX Volaility Analysis - 19th Mar 19
FREE Access to Stock and Finanacial Markets Trading Analysis Worth $1229! - 19th Mar 19
US Stock Markets Price Anomaly Setup Continues - 19th Mar 19
Gold Price Confirmation of the Warning - 18th Mar 19
Split Stock Market Warning - 18th Mar 19
Stock Market Trend Analysis 2019 - Video - 18th Mar 19
Best Precious Metals Investment and Trades for 2019 - 18th Mar 19
Hurdles for Gold Stocks - 18th Mar 19
Pento: Coming QE & Low Rates Will Be ‘Rocket Fuel for Gold’ - 18th Mar 19
"This is for Tommy Robinson" Shouts Knife Wielding White Supremacist Terrorist in London - 18th Mar 19
This Is How You Create the Biggest Credit Bubble in History - 17th Mar 19
Crude Oil Bulls - For Whom the Bell Tolls - 17th Mar 19
Gold Mining Stocks Fundamentals - 17th Mar 19
Why Buy a Land Rover - Range Rover vs Huge Tree Branch Falling on its Roof - 17th Mar 19
UKIP Urged to Change Name to BNP 2.0 So BrExit Party Can Fight a 2nd EU Referendum - 17th Mar 19
Tommy Robinson Looks Set to Become New UKIP Leader - 16th Mar 19
Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - 16th Mar 19
Towards the End of a Stocks Bull Market, Short term Timing Becomes Difficult - 16th Mar 19
UKIP Brexit Facebook Groups Reveling in the New Zealand Terror Attacks Blaming Muslim Victims - 16th Mar 19
Gold – US Dollar vs US Dollar Index - 16th Mar 19
Islamophobic Hate Preachers Tommy Robinson and Katie Hopkins have Killed UKIP and Brexit - 16th Mar 19
Countdown to The Precious Metals Gold and Silver Breakout Rally - 15th Mar 19
Shale Oil Splutters: Brent on Track for $70 Target $100 in 2020 - 15th Mar 19
Setting up a Business Just Got Easier - 15th Mar 19
Stock Market Elliott Wave Analysis Trend Forercast - Video - 15th Mar 19
Gold Warning - Here Are the Stunning Implications of Plunging Gold Price - Part 1 - 15th Mar 19
UK Weather SHOCK - Trees Dropping Branches onto Cars in Stormy Winds - Sheffield - 15th Mar 19
Best Time to Trade Forex - 15th Mar 19
Why the Green New Deal Will Send Uranium Price Through the Roof - 14th Mar 19
S&P 500's New Medium-Term High, but Will Stock Market Uptrend Continue? - 14th Mar 19
US Conservatism - 14th Mar 19
Gold in the Age of High-speed Electronic Trading - 14th Mar 19
Britain's Demographic Time Bomb Has Gone Off! - 14th Mar 19
Why Walmart Will Crush Amazon - 14th Mar 19
2019 Economic Predictions - 14th Mar 19
Tax Avoidance Bills Sent to Thousands of Workers - 14th Mar 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast March to September 2019

Forecasting US 30-Year Treasury Bond Yields

Interest-Rates / US Bonds Sep 07, 2017 - 08:04 PM GMT

By: Francois_Soto

Interest-Rates The movement of interest rates affects lenders and creditors across global markets while influencing key variables such as output, employment, etc.

We predict the US Generic 30-Year Treasuries Yield using a selection of macroeconomic variables chosen from hundreds of time series available.

We trade US1 future contracts based on the differential between the regression output and the actual yield and this strategy is profitable.

Interest rates are an important monetary policy tool to gauge the state of the economy and for policy makers to act accordingly. Per its definition, it is the rate at which interest is paid by a borrower for the use of money. The movement of interest rates affects lenders and creditors across global markets while influencing key variables such as output, employment, consumption, etc.



In this piece, we attempt to forecast US Long-Term Treasury Yields. The dependent variable under observation is the US Generic 30-Year Treasuries Yield, which can be traded indirectly with US1 future contracts. We explain each step to create a factor-based model using macroeconomic variables. We then illustrate how the output can be turned into actionable advice.

Based on research from the academic literature and hundreds of time series available, we retain ten macroeconomic factors as being potential leading indicators of US 30-Year Treasuries. The symbol in the bracket is an internal abbreviation of the factor that will be used subsequently to ease readability. Please take note we won’t discuss adjustments of time series in this piece.

CRB All Commodities [CRBA]

It includes energy, metal and agricultural commodities. In the current environment, lower commodity prices mean more discretionary income for U.S. consumers as they usually act as an indirect tax levy. Therefore, improved economic conditions eventually triggers rates to go higher.

Source: Thomson Reuters

FAO Agricultural Price [AGRI]

AGRI measures the international price change of a basket of five food related commodity groups across the world. The index was created by the Food and Agriculture Organization of the United Nations. This variable behaves in the same way as the CRB All Commodities Index relative to interest rates.

Source: FAO.org

PPI Foodstuff & Feedstuff [PPIF]

This indicator measures the change of prices received by domestic producers of the food industry. It considers three levels of demand: commodity, within industry and final demand for the product. This variable behaves in the same way as the CRB All Commodities Index relative to interest rates.

Source: Federal Reserve

Free Credit Balance [FREE]

The amount of money free from withdrawal restrictions that remains after all securities purchases, margin requirements, short sale proceeds and special considerations. An increase of this amount usually means market participants are becoming risk averse, which means lower rates ahead.

Source: FINRA.org

Emerging Markets [EMER]

21 emerging economies with intermediate income, catching-up growth, institutional transformations and economic opening. Because they are significant US export trade partners, they tend to have an indirect influence over interest rates via the base material / commodities trade.

Source: MSCI

Convertibles Arbitrage [CONV]

Market-neutral investment strategy employed by fixed-income hedge funds. Convertibles are sometimes priced inefficiently due to various reasons such as illiquidity or psychology. They exploit these inefficiencies on various fixed-income instruments which can offer a forward guidance.

Source: Hedge Fund Research

Used Vehicle Value [MUVV]

The Manheim Used Vehicle Value Index is a monthly indicator that calculates the value of more than 5 million used car transactions split into 20 market classes every year. It takes into consideration the average price and average mileage for each model / year / make / trim and excludes outliers.

Source: Manheim

First Year IPO [FIPO]

The Bloomberg IPO Index tracks the first-year performance of IPOs on the secondary market. Companies can raise money either with equity or debt. Usually, we tend to see higher IPOs when the US economy is in its late stage. Higher delinquencies usually mean lower interest rates in the long run.

Source: Bloomberg

Mortgage Loans [MORT]

This corresponds to the total amount of mortgage debt outstanding in the US expressed in a Year Over Year basis. Mortgage loans are crucial to explaining long rates. As debt leveraging increases, so does the associated credit risk. The additional risk is eventually reflected with higher interest rates.

Source: Federal Reserve

MBA Purchase Index [MBAP]

The Mortgage Bankers Association’s Index is a nationwide home loan application measurement that covers about 75% of the US mortgage activity. This leading indicator seems to be a predictor of interest rates over the last years, specially following the sub-prime mortgage meltdown.

Source: Mortgage Bankers Association

Now that our variables are defined, we will calculate a correlation matrix to discard variables that may create multicollinearity. Because AGRI, CRBA, PPIF and EMER are all somewhat linked to inflation, they are highly correlated, we will only keep PPIF. Between FREE vs. FIPO, we keep FREE and between MORT vs. MBAP we keep MORT. We are left with only four independent variables.

The four variables are FREE, PPIF, CONV and MORT. We calculate a multiple regression and we end up with this equation: 30YR = 4.35 – 0.50 FREE – 0.15 PPIF – 0.20 CONV + 0.24 MORT. If you look at the chart below, the multiple regression is shown in green, an upper / lower band of one standard deviation in light blue and our 30-Year Treasuries yield target of 2.7% in orange.

The regression is the theoretical price at which the long-term yield should be trading and the actual price includes a sentiment component. One way to use this information is to take positions in US1 future contracts whenever the differential between the Theoretical Price – Actual Price reaches an extreme level. The indicator below is the differential between two extreme boundaries.

The last extreme level occurred on December 9th, 2017 (purple circle). The indicator hinted US1 Long-Term bonds are very cheap and a reversal might follow. Therefore, the model went long US1 future contracts at that time. The large profits from this position are still unrealized as we are waiting for the differential to reach the opposite extreme later this year or possibly in 2018.

The simulation of this US Long-Term Bond Model realized a strong PnL curve (see below). The US1 Signal refers to the position taken by the model: +1 = Long and -1 = Short. At the time of writing, the model still recommends investors to be long US1. A short position will only be initiated when the differential goes to the opposite extreme (see arrow on the previous chart).

In conclusion, we predicted the US 30-Year Treasuries Yield with a multiple regression using four variables. This model most likely needs to be revised on a yearly basis to adjust coefficients and monitor that a significant regime change didn’t create a material impact on the model. The differential can be used as a contrarian indicator when extremes are reached as we have shown.

By François Soto CFA, MBA, FRM, CIM

www.inovestor.am Vice-President, Portfolio Management

François Soto is Inovestor Asset Management’s Vice-President and Portfolio Manager. He is leading the investment process for Canadian, US and Global equities while also overseeing the financial research department. Before joining the firm, François accumulated 10 years of experience working for various financial institutions. François holds a MBA degree specializing in Finance from HEC Montreal (2011) and is a CFA charterholder (2016), a FRM charterholder (2010) and a CIM charterholder (2010).

© 2017 François Soto. All rights reserved. Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules