Heine's Bond Allocation Model

Heine's Bond Allocation Model, also known as Heine's Bond Trading Model, was developed by Richard Heine, a money manager. This strategy was first published in 1995, aiming to surpass the performance of the traditional buy-and-hold approach specifically for bond ETFs by integrating price and macroeconomic indicators​​​​.

The model operates under specific rules that involve assessing various financial indicators such as the Dow Jones 20 Bond Index, the Dow Jones Utility Average, Long Bond Treasury Yield, the 13-wk T-Bill Yield, and the CRB index. For example, the model may suggest buying a bond ETF if certain conditions based on these indicators are met, and it recommends rebalancing on a weekly basis​​.

Be aware that the Dow Jones 20 Bond Index has been discontinued; nonetheless, any bond index can serve as an appropriate alternative. In our analysis, we used the Bloomberg US Aggregate Bond Index.

Richard Heine, the inventor of the model, was the founder and president of Income and Asset Advisory Inc., a capital management firm based in New York. The model's primary goal is not just to beat the standard buy-and-hold investment strategy but also to significantly reduce the risks typically associated with bonds by employing a combination of price indicators and macroeconomic signals. The model adopts two main investing philosophies: "Don't fight the tape" and "Don't fight the Fed," aiming to align bond investment decisions with broader economic trends and interest rate movements​.

At the time of writing this article, Heine's model is almost 30 years old and throughout its history, it has been subject to criticism. Therefore, we decided to investigate its long-term performance through backtesting.

The P&L curve of this model looks as follows:

Performance parameters are included in the table below:

The above history shows that on a total-return basis, Heine's model demonstrates performance comparable to buy-and-hold. However, when looking at the risk, this model clearly beats the benchmark by offering more than twice as low drawdown.

As part of the TradeMachine project, we focus on swing trading, not capital allocation models, hence the subscription does not include indications of the model as such.

However, we have developed a mechanical swing trading on long-term bonds (ETF ticker: TLT) based partially on this model, which offers great risk-adjusted returns and is available to our subscribers, details below.