Value investing is stocks is the oldest and most well-known strategies. Investors should consider the tactics used in value stock investing and apply it to bonds, says Nomura Securities.

Nomura Value investing works

Note to investors details bond trading strategies

In a recent note to investors, Nomura applies the principles of value investing across the yield curve. Using techniques similar to those used in equities can assist bond investors identify value.

Nomura global equity Value investing

In 1934 – as the great depression was in full swing – value investing luminaries Benjamin Graham and David Dodd set forth principles of value investing, which has been followed by a host of top stock investors including Warren Buffett and Seth Klarman. The core of the strategy is simple: buy quality when it is on sale, as Buffett might say.

Strategy to identify value and bubbles

Nomura rates outperform Value investing

Perhaps among the more interesting points, the report noted the value of a long/short strategy in rates and discussed bubble identification tactics.

An appropriate long/short value strategy in rates outperforms a long-only benchmark, is an interesting trading strategy. “Being free to trade the best points of value across curves and currencies, without constraining the strategy to hold pre-specified pairs, can help make the strategy robust,” the report advises.

Bubbles along the yield curve develop gradually in both equities and rates, the report noted. “Equities and rates don?t sell off when they are cheap – crashes occur in the context of stretched valuations.”  The report noted that value-signals should be used to provide warnings in both stocks and bonds.

Value outperforms momentum

Nomura looking for value Value investing

Value investing strategies can outperform

Interesting for momentum-based trend followers, value strategies can outperform when momentum suffers, momentum tends to underperform when rates are close to zero and markets range-bound, the report noted. In such trendless conditions, value or mean-reversion trades tend to outperform.

Be mindful of the carry in interest rates, the report urges, because it is analogous to earnings yield (E/P) in equities. Just as stocks with high earnings yield outperform those with low earnings yield, curve points with high carry outperform those with low carry.

Compare earnings yield both relative to its own time-series history and across stocks (cross-sectional), the report advised, because it is important to place current valuations in context. Similarly, comparing carry on both time-series and cross-sectional basis is equally important.