Fresk: Bonds At A Crossroad

February 03, 2014

To illustrate, AGND targets a negative five duration, and as the long side of the portfolio (the Barclays US Aggregate) is approximately a positive six-year duration, the short futures pair off and run at an approximate negative 11-year duration (using a combination of long-dated futures).

The resulting key rate duration exposure is as follows:


The result is a portfolio that targets a short position primarily in the 10- to 20-year part of the curve, with a small degree of a curve-flattener position (about a 1.3-year long exposure to five years and in, while being short seven-year rates and 30-year rates to offset).

While this positioning could be a little aggressive for some advisors, an option to temper the negative-duration exposure would be to pair the negative-duration ETF with the similar zero-duration offerings in AGZD and HYZD. While similar in construction, these ETFs use shorter-dated futures to create a zero- (rather than negative-) duration portfolio.

The following shows the effect of using a 50/50 AGND/AGZD portfolio:


While the long side of the portfolio continues to be the Barclays US Aggregate, this blended portfolio tempers the duration exposure to a negative 2.5 years. This also negates some of the curve-flattener exposure, keeping it to a purer short-duration exposure.

Lastly, for advisors who do not have a strong viewpoint as to where rates are headed, being tactical in the portfolio may be the best option.

Having the flexibility to move toward long or short duration, long or short spread, or alternative sources of income in an uncertain market may prove more beneficial over trying to predict what will happen and either taking undue risk in an allocation or missing potential opportunities.

Founded in 1993, Stadion Money Management is a privately owned money management firm based near Athens, Ga. Via its unique approach and suite of nontraditional strategies with a defensive bias, Stadion seeks to help investors—through advisors or retirement plans—protect and grow their “serious money.” Contact Stadion at 800-222-7636 or

References to specific securities or market indexes are not intended as specific investment advice.


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