US FIXED-INCOME SECTOR ALLOCATION

In this article, the author studies the cross-sectional relationship i n returns across sectors of the U.S. fixed-income market. The Salomon Brothers BIG Index provides a comprehensive, trader-priced data base o f monthly returns. The author constructs portfolios such that the risk characteristics of each portfolio remain relatively constant through time. Types of fixed-income securities that have offered superior retu rn for a particular level of risk over an eight-year period are identi fied. Optimal portfolios based on these historical returns are formed in a mean-variance framework. The excess returns of the mean-variance strategies are then tested out-of-sample, and practical considerations are addressed.