Quantitative alpha strategies in interest rate markets have repeatedly been questioned over recent years. Regular interventions by central banks – often running contrary to fundamental trends – were a challenge for the forecasting quality of numerous approaches. Yet it is possible to generate robust outperformance, even in difficult market conditions, by applying a diversified multi-factor rates overlay.
The pricing of assets on the capital markets is usually driven by the relationship between supply and demand: all prevailing interest rates cannot escape this market mechanism over the long term. Yet in recent years, there has been increasing evidence of a decoupling, in the wake of the global financial markets crisis and the subsequent euro crisis. Numerous cases of coordinated political and central bank interventions have pushed sovereign bond yields to levels which were not always justified by fundamentals, and which were impossible to forecast using conventional (factor) approaches. An innovative interest rate overlay, which delivers robust and reliable outperformance in spite of these influences, is not only based on fundamental duration strategies, but employs a multi-factor approach combining various interest rate risk premia.
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