RT Journal Article SR Electronic T1 Factor Investing in US Sovereign Bond Markets: A New Generation of Conditional Carry Strategies with Applications in Asset-Only and Asset-Liability Management JF The Journal of Portfolio Management FD Institutional Investor Journals SP 121 OP 140 DO 10.3905/jpm.2019.1.115 VO 46 IS 2 A1 Jean-Michel Maeso A1 Lionel Martellini A1 Riccardo Rebonato YR 2019 UL https://pm-research.com/content/46/2/121.abstract AB This article provides a detailed analysis of the theoretical, statistical, and implementation challenges related to factor investing in the US sovereign bond markets, with a focus on the level factor, which explains for any maturity the largest fraction of differences in bond returns over time. Using a comprehensive database of individual bond returns in the United States covering the 1975–2018 sample period, the authors find that a conditional version of a carry strategy based on a time-varying exposure to the level factor can generate up to 210 bps of excess performance (gross of transaction costs) over the benchmark and a significantly higher Sharpe ratio. Overall, their results suggest that even in a single-issuer universe with highly correlated bond returns, and after accounting for transaction costs, conditional investing strategies based on second-generation return-predicting factors can lead to robust benefits from both asset-only and asset-liability management perspectives.TOPICS: Analysis of individual factors/risk premia, factor-based models, style investingKey Findings• Conditional carry strategies based on second-generation return-predicting factors generate excess performance with respect to both unconditional carry strategies and conditional carry strategies based on the slope of the yield curve.• These strategies remain profitable when implemented at a CUSIP level, even when transaction costs and long-only constraints are accounted for, and show particularly strong levels of outperformance in increasing interest rate environments and in bear equity markets.• For liability-driven investors, these conditional carry strategies can be used to generate dynamic active duration bets with respect to the liability benchmark and substantially outperform a strict duration-matching strategy with relatively modest levels of tracking error.