This month’s report will focus a close eye on the bottom and top two factors by performance, respectively: Equity and Interest Rates and Momentum, and Foreign Exchange Carry.


Exhibit 1: September Two Sigma Factor Lens Performance

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 - September 2023


Equity and Interest Rates: Going into 2023, many investors with “diversified" portfolios were shellshocked from their 2022 experience of equities and bonds falling together. However, throughout 2023, diversification between these two macro factors increased meaningfully with correlations reaching historically familiar negative territory (Exhibit 2). This may have been due to some market participants believing inflation had cooled and global rates were close to peaking, deemphasizing the market themes that bound these factors together previously.  


Exhibit 2: YTD Rolling Correlations Between Equity and Interest Rates Factors

Source: Venn by Two Sigma


September told a different story however, as the lingering phrase “higher for longer,” referring to the Fed funds rate, started to finally sink into markets alongside strong economic data. 


Using the US as an example, in September we learned that the Federal Open Market Committee favored an additional rate hike in 2023 and sees only two rate cuts for 2024, which is two fewer than the June forecast.1 This was accompanied by headlines of 16-year highs for 10-year Treasury yields, approaching 5%.2 While the theme of “higher for longer” is different from 2022’s “high inflation and rising rates,” they are no doubt related, showcased by Equity and Interest Rates’ falling together in September. 


We will continue to keep a close eye on the relationship of Equity and Interest Rates as they are tier 1 macro factors and have important implications for portfolio risk broadly.


Momentum: It may seem like rates markets were hit with a reality check in September, but Momentum performance implies that trends in equity markets were already well positioned to absorb the theme.


More specifically, Momentum looks at trailing 1-year relative performance when selecting which stocks to position long or short. This means stocks that had been performing relatively well over the last year were the same stocks that performed relatively well in September. In fact, Momentum as a portfolio is currently the best performing factor in the Two Sigma Factor Lens year to date (up 9.26%) and has been negative in only two out of nine months. 


Exhibit 3: YTD Performance for Momentum

Source: Venn by Two Sigma


Foreign Exchange Carry: This factor determines positioning in currencies based on cash rate differentials: going long high-yielding currencies while shorting those with lower yields. Notable positioning for September was long USD and short JPY, where respective cash rates were 5.45% and -0.17% to end the month.3 


In September the USD appreciated 2.63% versus the JPY, reaching historically significant levels of ~150 JPY per USD. This level has not been reached since the early 1990s. The JPY quickly rebounded to ~148 per USD in the first few days of October, with some market participants attributing this to Bank of Japan Intervention.4 Recently there has been a clear relationship between movements in this currency pair and the FX Carry factor overall (Exhibit 4).


Exhibit 4: FX Carry and USDJPY Cumulative Return in September

Source: Venn by Two Sigma, Bloomberg



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3 Cash rates proxied using respective 3-month sovereign bond yield. Source: Bloomberg.





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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