Betting against Beta with Bonds: Worry or Love the Steepener?

Although “betting against beta” with government bonds (BABgov) seems profitable, questions remain. First, to what extent are BABgov profits an anomaly? Previous studies do not address routine valuation frameworks, such as term-structure models or principal components analysis. Second, “low” in low-risk investing refers to the second, not third, moment of returns, and prior research does not address coskew preferences. To consider the third question—breadth—I examine 20 non-US markets. On balance, BABgov is found to produce alpha, but primarily for the United States and with substantial systematic risk. Investors should follow BABgov cautiously.Author’s note: The views in this article reflect those of the author and not any other person at Brevan Howard US Investment Management LP. The information has been obtained or derived from sources believed by the author to be reliable. However, the author does not make any representation or warranty, express or implied, as to the information’s accuracy or completeness, nor does the author recommend that the information serve as the basis of any investment decision. This article does not constitute an offer or solicitation of an offer, or any advice or recommendation, to purchase any securities or other financial instruments and may not be construed as such.Editor’s note: Executive Editor Stephen J. Brown recused himself from the peer-review and acceptance processes because of a potential conflict of interest. Laura T. Starks, who served as Pro Tem Executive Editor, reviewed and accepted this article.