Bond: Algorithm vs. Barbell strategy
Today we try to compare two different bond strategies. On the one hand the Barbell strategy, on the other our algorithm, the one that manages all our analyses.
The Barbell strategy combines short-term and long-term bonds, excluding those with intermediate maturities. This strategy aims to balance risk and return by exploiting the advantages of both bond categories. Short-term bonds offer greater liquidity and lower rate risk. Long-term ones present more risk but offer higher returns, particularly in a declining rate environment.
The KbMeter algorithm uses AI analysis models and takes an exclusively price-based approach. It aims to identify which of the two elements (short-term securities and long-term securities) has the best valuation in the reference period considered (in our case the week).
Using two ETFs listed on Borsa Italiana, the Xtrackers II Eurozone Government Bond 25+ (X25E) and the iShares € Govt Bond 0-1yr (‘IEGE’), we simulated a comparison between Barbell (50/50) and Algorithm.
As the chart only considers the performance of the two strategies, both the performance of the index series (i.e. the algorithm) and the performance of the B&H series (i.e. the Barbell 50/50 strategy) are not total returns and do not take into account the coupons distributed or accumulated by the ETF.
Looking at the blue line, we can see the horizontal phases representing the moments when the algorithm was negative on both instruments. Of the 300 weeks included in the simulation, 10 recorded negative performance. With an annual standard deviation of 5.2% against 8.26% for the Barbell strategy.
Looking only at 2024, the barbell strategy lost 0.26% while the algorithm gained 2.2%. The total return of the X25E in 2024 was -3.96%, while the IEGE gained +3.58%. Overall, the Barbell 50/50 returned -0.009% in 2024.
Beyond the figures, the comparison seemed useful to us, on the one hand, to show how our algorithm works, in particular its volatility control, and, on the other, to remind us that the use of indirect bond instruments such as ETFs can significantly limit the undoubted advantages of a barbell strategy based on yield management.
