Trend Following Bonds by Paul Novell

Trend Following Bonds is a tactical bond rotation strategy developed by Paul Novell, a quantitative investor and blogger who built his financial independence around rules-based asset allocation and retired at 41. Applying Gary Antonacci's Dual Momentum framework to a diversified global bond universe, the strategy selects the best-performing bond asset classes each month while moving to cash when none clears the bar.

Investment Philosophy

The strategy is built on two well-documented ideas: relative momentum (the best-performing assets tend to continue outperforming in the near term) and absolute momentum (if an asset is losing ground even to cash, step aside). Applied to the bond market, this creates a rotation system that captures fixed-income returns during favorable conditions while avoiding sustained bond bear markets. The combination of these two filters is designed to improve on buy-and-hold bond investing without requiring any macro forecasting.

Who It's For

Well-suited to retirees and near-retirees who rely on bonds as a portfolio anchor and want a rules-based defense against prolonged bond drawdowns. It also works as a defensive complement to an equity-heavy portfolio given its historically low correlation to stock markets. Investors must be comfortable trading monthly and following mechanical signals without deviation.

Pros

• Low correlation to equity markets -- a genuine portfolio diversifier
• Absolute momentum filter provides a safety valve during bond bear markets
• Broad global bond universe captures multiple sources of fixed-income return
• Historically positive during periods of severe equity market stress

Cons

• Monthly rebalancing required -- more active than buy-and-hold bond investing
• Momentum signals can lag fast-moving rate changes
• Not suitable as a standalone long-term growth strategy
• Average cash position reduces return potential in exchange for downside protection

Technical Notes

The strategy ranks bond asset classes by their 6-month total return each month, selects the top performers, and applies an absolute momentum filter comparing each to short-term Treasuries. Any selected asset failing to beat cash over the lookback period moves to cash instead. Monthly turnover makes tax-advantaged accounts strongly preferable. For a similar momentum approach applied to a broader multi-asset universe, see the Ivy Portfolio.