Bonds: Liquidity

Buy on the up arrows, sell on the down arrows

This tool is intended to predict bond prices based on government policies, using data on monetary policy available at the time, specifically interest rates. For comparability government bond indexes have been rebased to set year-end 1994 at 100.

In each chart the bond price index is shown as the thick white line on the right hand axis. The main explanatory variable, interest rates uses the left hand axis, shown as the thin yellow line. Buy & sell signals are shown as red arrows embedded in the price index.

This tool works on the assumption that governments rarely make a change in policy all at once, but spread out over a number of intermediate steps, so the effects of a change create a trend over time that investors can exploit. However, in times of crisis this is not the case, so signals  may be too late. Buy signals are generated when interest rates begin to fall. Sell signals arise when the converse applies. Noise reduction methods have been employed to minimise the number of signals.

Back-tested past performance of this strategy shows that it can be an effective way both to raise returns and to reduce risks.

Owing to the conversion of legacy currencies into Euros, analysis is provided on a common bond market denominated in Euros, rather than for individual countries. Historical data is provided by creating synthetic GDP-weighted time-series for the component currencies, expressed in the European Currency Unit.

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