Seeking Beta in the Bond Market: Avoid Bonds

Nearly 2 years ago, at the end of August 2011, the BVR model signaled the beginning of a down market for bonds. Since then long bond funds have returned a total of about 6% and short bond funds about 2%, while SPY, the exchange traded fund tracking the S&P 500, gained almost 40%. Recently bonds lost a lot of value, but fund manager Grundlach feels that the worst is over, and “with the markets settling, there are deals to be had”. However, the BVR model is signaling continued weakness for the bond market.

Fig 3 BVR 6-28-13Click to enlarge

The model’s message is loud and clear: Avoid long bonds and intermediate duration bonds as well until the BVR moves below the lower offset limit line and turns upward from there. The time frame for this is uncertain; it could be months or years.

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3 comments on “Seeking Beta in the Bond Market: Avoid Bonds
  1. Rick4xtrader says:

    Hello Mr. Vrba,

    I have been reading this article, and the article specifically about BVR over and over again, yet I can’t figure out exactly how the BVR is calculated. I know it is not simply the yield spread between the 30 and 10 year notes. Can you please shed some light on the formula to calculate the BVR? I find it very interesting. Thank you for your time,


  2. geovrba says:

    Please select tab FAQ – see second question and answer.

  3. Rick4xtrader says:

    Still confused however. I noticed this value usually stays between 4.0 and 6.0. Why does the ratio start at about 4.25 back in 1986? How is that being calculated? Would you be able to provide an example? I’m trying my best to understand this….

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