Beating Your Benchmark - Evidence from the Canadian Bond Market

This paper presents evidence of the predictability of monthly fixed-income sector returns using Canadian bond market data from July 1994 to September 2004. To measure the economic value of this predictability I use a dynamic mean-variance optimization methodology that is designed to approximate the investment decision an active sector-rotation bond manager faces each month. Optimal out-of-sample portfolios of the 18 sub-indices of the Scotia Capital Bond Universe are formed on a monthly basis using the sub-indices' average yield to maturity as naYve mean-return estimator. The value of the of the yield-to-maturity estimator is assessed using ordinary least-squares regression as well as the information ratio of an investment strategy that invests in the optimal portfolios. Results are presented and analyzed in a performance attribution framework designed to identify the sources of excess return.