Nyheter
Yielding towards the right bond model
Asset Allocation Research Yielding towards the right bond model
Highlights
- With interest rates likely to rise in the US and inflation likely to increase both in the US and EU, it is time for investors to reduce their exposure to bonds.
- However, bonds remain key in reducing investors’ portfolio risk. Our model based on fundamentals can help mitigate the upcoming downturn in the bond market.
- Applying our model to a portfolio of bonds enhanced the Sharpe ratio to 1.61 compared to 1.51 for its benchmark by increasing return by 0.2% per year.
As inflation increases on a global basis, central banks are likely to raise rates to keep inflation around their target. An increase in interest rates will, in turn, have a negative impact on the value of bonds. Record low interest rates in developed markets have favoured investments in riskier instruments as investors sought higher returns and income. An increase in interest rates is likely to be followed by a rotation to less risky assets as investors are by nature risk-averse, potentially moving towards more cash or sovereign bonds to the detriment of high yields.
In our tactical portfolio (and its latest update – Underweight US, Europe and precious metals), we use models to determine our positions in equities, bonds and commodities. While we have previously explained what goes into the equity and commodity models, this is our first note outlining in detail our bond model. We start with the indicators the model uses as trading signals, followed by the model mechanism and concluding with the portfolio of bonds and a performance analysis of the portfolio compared to its benchmark and the Bloomberg Barclays US Aggregate Bond Index since 2007.
Inflation expectations
Inflation can be measured in many ways. Inflation expectations measured by the 5yr 5yr forward inflation rate reflects the markets’ expectations on how central bank policies will impact inflation in the future. Technically, it represents the level of inflation expected over 5 years 5 years from now.
US and EU inflation expectations are highly correlated. A surge in inflation expectations like the one the market is currently witnessing means that inflation will likely increase and central banks will likely increase interest rates, undermining bonds.
In our bond model, we include the inflation expectations for both regions combined with their respective interest rate spreads (see chart below for the US).
Interest rate spread
The base rate is the rate at which central banks lend money to domestic banks. The 10yr forward rate is the rate at which investors are able to borrow money in 10 years from now, providing an indication on how the base rate should move in the future. With inflation expectation rates surging, the 10yr forward rates are rising, widening the spread with the base rates. This provides further certainty on an imminent rate hike, at least in the US, which would be prohibitive for US bonds.
(Click to enlarge)
Historically, the base rate moves most of the time in line with its 10yr forward rate if it does not catch it up. With the 10yr forward surging to 2.2% in the US while the base rates are currently at 0.95%, we will likely see the US Federal Reserve, increase its base rate, tightening the spreads.
In our model, we are using the spread between the 10yr forward rate and the base rate for the US and the EU combined with their respective inflation expectations as trading signals.
Credit default swap
A credit default swap (CDS) is a financial instrument that allows for the seller to transfer the credit exposure of a fixed income product to one or more parties. An increase in the value of the CDS indicates rising demand for insurance against a risk of default from the entity behind the underlying bond. It serves as a measure of the level of risk in the fixed income market.
(Click to enlarge)
Our analysis shows that there is a strong correlation between the quarterly return of bonds and the quarterly change of its respective CDS as illustrated above. In our bond model, we are taking into account the CDS level of each component of the portfolio relative to their respective first and second standard deviations above and below average.
The model mechanism
The model will tell us to overweight a bond if
– inflation expectations are at a turning point (switching from increasing to decreasing), and
– interest rate spreads are at a turning point (switching from increasing to decreasing), and
– the CDS of the bond is below its first or second standard deviation.
The model will tell us to underweight a bond if the opposite conditions to the above are aligned.
(Click to enlarge)
The above chart shows the portfolio historical positions in EU Sovereign bonds based on the model. While far from being perfect, it still manages in most occasions to signal the right changes ahead of price movements.
Performance and positioning
We created two diversified portfolios of bonds: our portfolio and its benchmark. Both have the same constituents as illustrated in the next table and rebalance on the first business day of every month. The benchmark rebalances back to its initial weights while the portfolio rebalances to a set of new weights based on the signals previously described.
(Click to enlarge)
For December, the model recommends to go underweight most of the components of the portfolio compared to the benchmark, except for US investment grade where the model recommends a neutral position. This results in a higher allocation to cash.
(Click to enlarge)
Applying the model to the portfolio of bonds shows that the portfolio outperforms its benchmark by 0.2% per year for the same level of volatility, improving the Sharpe ratio by 6.3% from 1.51 for the benchmark to 1.61.
(Click to enlarge)
We also note that the portfolio and its benchmark outperform the Bloomberg Barclays US Aggregate Bond Index (former Lehman Aggregate Bond Index) by at least 1.4%, reduce volatility and more than double the Sharpe ratio. This can be explained by a change in universe, weights and rebalancing methodology.
Important Information
General
This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).
Stablecoins are digital currencies tied to assets like the U.S. dollar, offering the price stability needed for payments. They maintain their peg by being backed 1:1 by their underlying fiat currency, with issuers holding equivalent amounts in cash and cash equivalents, making stablecoins a digital representation of those reserves. Their market has doubled to over $235 billion, with daily usage nearly doubling in two years.
Why are stablecoins making headlines now?
Due to their clear product-market fit and growing mainstream adoption, stablecoins have become a top priority for regulation, with both industry leaders and policymakers calling for swift action.
On April 4, the Securities and Exchange Commission’s Division of Corporation Finance finally clarified that stablecoins are not securities if backed one-for-one by USD or similar assets and used for payments or value storage. These “Covered Stablecoins” are not marketed as investments, lack profit incentives, and include protections like reserves, making securities law registration unnecessary for issuance or redemption.
The GENIUS Act, introduced in February and advanced by the U.S. Senate Banking Committee in March, marks a major step toward creating a clear legal framework for stablecoin issuance and oversight. This clarity is driving momentum as Fidelity is set to launch its own stablecoin, and Bank of America is preparing to follow it once legislation is finalized.
Globally, the European Union’s Markets in Crypto Assets (MiCA) framework has already come into effect, reinforcing a broader shift toward formal integration of stablecoins into traditional finance. These developments reflect a growing consensus that stablecoins are emerging as essential infrastructure for global payments, treasury management, and digital asset adoption.
What are the benefits of stablecoins?
Stablecoins are digital currencies designed for fast, low-cost, and stable transactions. Since their launch in 2014, they’ve become a go-to tool for online payments, especially cross-border transfers. As they’re pegged to stable assets like the U.S. dollar or euro, they avoid the wild price swings seen in other cryptocurrencies.
They’re accessible to anyone with internet, making them especially valuable in regions with high inflation or limited banking access, like Argentina or Turkey.
With some built on public blockchains, stablecoins offer transparency, letting users track transfers and supply in real time. For institutions, they also simplify treasury management by acting as efficient digital cash that can be deployed instantly.
Who are the major players in the stablecoin race?
Tether (USDT) and Circle (USDC), the two largest stablecoin issuers, collectively hold over $204 billion in U.S. Treasuries, making them the 14th largest holders globally. Their combined treasury holdings surpass those of entire nations, including Norway and Brazil.
USDT leads with $144 billion in circulation; USDC, backed by Coinbase and known for compliance, has become a trusted digital dollar across global finance.
Why stablecoins matter: A revenue engine for blockchains
Stablecoins generate steady revenue for blockchains like Ethereum and Solana by driving transaction fees with each transfer. With trillions in annual volume, they help sustain network activity beyond speculation.
On Ethereum, for example, USDT and USDC transactions are major contributors to daily gas fees. Year to date, Tether ranks #3 and USDC ranks #5 in terms of total gas consumed. Tether and Circle also dominate daily transaction activity on Ethereum, averaging approximately 12 million and 6 million transactions per day, respectively, making them the top two entities on the network by daily transaction count.
Meanwhile, on Solana, stablecoin activity has surged, helping sustain validator rewards and strengthen protocol economics. In addition to the mainstream utility, stablecoins represent reliable, protocol-level cash flow, making them crypto’s killer use case.
Research Newsletter
Each week the 21Shares Research team will publish our data-driven insights into the crypto asset world through this newsletter. Please direct any comments, questions, and words of feedback to research@21shares.com
Disclaimer
The information provided does not constitute a prospectus or other offering material and does not contain or constitute an offer to sell or a solicitation of any offer to buy securities in any jurisdiction. Some of the information published herein may contain forward-looking statements. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those in the forward-looking statements as a result of various factors. The information contained herein may not be considered as economic, legal, tax or other advice and users are cautioned to base investment decisions or other decisions solely on the content hereof.
Stablecoins: The real powerhouse of crypto
BE29 ETF är en portfölj företagsobligationer med förfall 2029
Guld-ETFer slår Bitcoin-ETFer kraftigt under första kvartalet 2025
INGH ETF är en satsning på global infrastruktur
SPFT ETF är en global satsning på teknikföretag
Fonder som ger exponering mot försvarsindustrin
Crypto Market Risks & Opportunities: Insights on Bybit Hack, Bitcoin, and Institutional Adoption
Montrose storsatsning på ETFer fortsätter – lanserar Sveriges första globala ETF med hävstång
Warren Buffetts råd om vad man ska göra när börsen kraschar
Svenskarna har en ny favorit-ETF
-
Nyheter4 veckor sedanFonder som ger exponering mot försvarsindustrin
-
Nyheter3 veckor sedanCrypto Market Risks & Opportunities: Insights on Bybit Hack, Bitcoin, and Institutional Adoption
-
Nyheter2 veckor sedanMontrose storsatsning på ETFer fortsätter – lanserar Sveriges första globala ETF med hävstång
-
Nyheter4 veckor sedanWarren Buffetts råd om vad man ska göra när börsen kraschar
-
Nyheter3 veckor sedanSvenskarna har en ny favorit-ETF
-
Nyheter2 veckor sedanMONTLEV, Sveriges första globala ETF med hävstång
-
Nyheter4 veckor sedanFastställd utdelning i MONTDIV mars 2025
-
Nyheter2 veckor sedanSju börshandlade fonder som investerar i försvarssektorn
