Saturday, December 10, 2011

Hello Mr. Bernake...

I was playing around tonight and came across something that looked odd.  Using the importSeries() created before, I grabbed dividend adjusted returns for SHY, IEF, and TLT (iShares Short, Medium, and Long Maturity Treasury ETFs respectively).  I was looking at efficient frontiers (more on that later) and saw that the IEF was very dominant.

from = "2001-01-01"
to = "2011-12-09"

tlt = importSeries("tlt",from,to)
shy = importSeries("shy",from,to)
ief = importSeries("ief",from,to)

merged = merge(tlt,shy)
merged = merge(merged,ief)

vars = c("tlt.Return","shy.Return","ief.Return")


> table.AnnualizedReturns(merged[,vars],Rf=mean(merged[,"shy.Return"],na.rm=TRUE))
Annualized Return0.07210.02840.0628
Annualized Std Dev0.14030.01730.0740
Annualized Sharpe (Rf=2.81%)0.3018-0.00870.4497
It struck me as odd that the IEF was so dominant with an annualized return of about 1% below TLT, but half the risk giving it a 50% increase in the Sharpe Ratio.  Then it hit me.  "Oh yeah, the QE programs were aimed at the middle of the yield curve."

Note to self, next time QE rolls around, play the IEF...

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