Finding optimal ways to express macroeconomic views in US Treasury Rates : A framework approach

This paper aims to provide a trading framework approach with an evidence-based set of trading signals and risk-reward metrics that identify the optimal way to express a macroeconomic view in the U.S Treasury market. The paper develops the trading framework which captures the two principal investment approaches: the fundamental and the quantitative. The framework consists of the two driving factors of the term structure of interest: level and slope. Based on the available treasury instruments for each driving factor, the paper develops the trading framework. The fundamental framework consists of a fair value model and a monetary policy model: the fair value model with an average hit rate of 54 percent allows the identification of which instrument has cheapened or richened beyond what is implied by market variables with the rest of the curve. The monetary policy model with an average of 80 hit rate identifies the trading bias suggested by the current Federal Open Market Committee (FOMC) tone of language and the monetary cycle regime.On the other hand, the quantitative model consists of three models which capture the following three technical factors in Treasury rates: The momentum model with an average hit rate of 68 allows the identification of current and potential trends. The seasonality model with an average hit rate of 53 allows identifying the instrument's trading bias based on its historical performance in the same given time frame. Finally, the volatility model enables the identification of the best risk/reward trade given the current volatility regime