In September, we discussed how the theme “higher for longer” caught markets off guard, especially in rates markets. This continued into October, solidified by strong economic data1 and the unwelcome return of higher than expected inflation in the US.2 


Against this backdrop, let’s take a closer look at the Two Sigma Factor Lens (TSFL) performance in October. 


Exhibit 1: Two Sigma Factor Lens Performance in October

Source: Venn by Two Sigma. The median and percentile columns measure the performance of each factor in the Two Sigma Factor Lens relative to the entire history of the factor in USD, using monthly data for the period March 1995 - October 2023


  • Equity and Interest Rates: Equity and Interest Rates (long bonds) fell together in October, confirming that the “higher for longer” theme has been facilitating positive correlations between the two. On the flip side, this may mean “lower diversification for longer” for investors still clinging to their equity/bond portfolios. In Exhibit 2, we show the move higher in rolling 6-month correlations between equity and bonds beginning in June, but accelerating over the last two months since “higher for longer” has taken over the market narrative.


Exhibit 2: Rolling 6-Month Correlations Between Equity and Interest Rates Factors

Source: Venn by Two Sigma


  • Momentum: In Exhibit 3, we show the performance of factors in our lens before and after 6/14/2023, the date when 6-month Equity and Interest Rate correlations began to rise (Exhibit 2). 


One notable observation is the outperformance of Momentum in both periods. Positive Momentum performance implies that stocks that have previously outperformed continued to do so. Importantly, equity momentum is a relative measurement, meaning it can be positive even if the universe of stocks is experiencing all positive or all negative returns. Notably, among equity styles, Quality has also maintained meaningful positive performance in both periods we show below. Both of these factors are designed to be beta neutral, helping them to achieve differentiated performance from the Equity factor. 


Exhibit 3: YTD TSFL Performance Separated by Periods of Falling and Rising Equity/Bond Correlation

Source: Venn by Two Sigma. “Falling Equity/Bond Correlation Period” refers to 1/1/2023–6/13/2023. “Rising Equity/Bond Correlation Period” refers to 6/14/2023–10/31/2023


  • Fixed Income Carry: It would be hard not to mention this factor as the Japanese 10-year bond made headlines in October, jumping from a yield of 0.77% to 0.94%.3 This occurred as the Japanese Yield Curve Control (YCC) policy continues to be malleable alongside global rising rates.4 


We’ve documented in the past how the YCC policy of Japan meaningfully affects positioning of factors such as Fixed Income Carry. More specifically, the 10-year Japanese Government Bond (JGB) is this factor's largest long position due to the attractive term spread the YCC policy maintains relative to other developed countries. This means that systematic FI Carry exposure may experience continued pain in its long book if the yield of the 10-year JGB continues to play catch up with other yields around the world. 


While Japan’s YCC policy may make its bonds the most interesting to track and discuss, it’s worth noting that Australia, another strong long position due to its relatively attractive term spread, also had its 10-yr yield rally in October. This was an additional contributor to negative Fixed Income Carry performance for the month. 


Exhibit 4: Term Spreads (left) and 10-Year Bond Yields (right)

Source: Venn by Two Sigma, Bloomberg



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References to the Two Sigma Factor Lens and other Venn methodologies are qualified in their entirety by the applicable documentation on Venn.

This article is not an endorsement by Two Sigma Investor Solutions, LP or any of its affiliates (collectively, “Two Sigma”) of the topics discussed. The views expressed above reflect those of the authors and are not necessarily the views of Two Sigma. This article (i) is only for informational and educational purposes, (ii) is not intended to provide, and should not be relied upon, for investment, accounting, legal or tax advice, and (iii) is not a recommendation as to any portfolio, allocation, strategy or investment. This article is not an offer to sell or the solicitation of an offer to buy any securities or other instruments. This article is current as of the date of issuance (or any earlier date as referenced herein) and is subject to change without notice. The analytics or other services available on Venn change frequently and the content of this article should be expected to become outdated and less accurate over time. Any statements regarding planned or future development efforts for our existing or new products or services are not intended to be a promise or guarantee of future availability of products, services, or features.  Such statements merely reflect our current plans.  They are not intended to indicate when or how particular features will be offered or at what price.  These planned or future development efforts may change without notice. Two Sigma has no obligation to update the article nor does Two Sigma make any express or implied warranties or representations as to its completeness or accuracy. This material uses some trademarks owned by entities other than Two Sigma purely for identification and comment as fair nominative use. That use does not imply any association with or endorsement of the other company by Two Sigma, or vice versa. See the end of the document for other important disclaimers and disclosures. Click here for other important disclaimers and disclosures.

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