The document describes modifications made to the original Zweig Bond Model. The original model used 4 indicators to generate buy and sell signals for bonds. The modified model adds a 5th indicator: a 50-day moving average crossover of the Dow Jones 20 Bond Average price with a 1% threshold. This helps avoid losses when prices are falling as the Fed eases. The modified model is backtested from 1966-1986, 1986-2014, and over the full period, showing improved results over the original model and buy-and-hold strategies. The modified model is also applied to the Fidelity Investment Grade Bond Fund and SPDR Barclays High Yield Bond ETF.

1. A Simple Model for
Bonds

2. Simple
Model for
Bonds
 Identify the five indicators
used in the modified form of
the Zweig Bond Model
Explain one reason why this
model might work well with
mutual funds

3. Simple Model for Bonds
The model's original four indicators:
Short–term slope of the Dow Jones 20 Bond Average: buy when the index rises
from a bottom by 0.6 percent and sell when the index falls from a peak by 0.6
percent.
The longer term slope of the Dow Jones 20 Bond Average: buy when the index
rises from a bottom by 1.8 percent and sell when it falls from a peak by 1.8
percent.
Changes in the discount rate: buy when the discount rate—the rate at which
banks borrow from the Federal Reserve Bank—drops by at least one half of a
percentage point and sell when the discount rate rises by at least a half point.
The yield curve, based on the difference between the yields on AAA corporate
bonds and 90– day commercial paper: buy when the spread crosses above 0.6 of
a percentage point and sell when the spread falls below –0.2. Go neutral
between –0.2 and 0.6.

4. Simple Model for Bonds
• The model's original four indicators:
1. BUY – When the Dow 20 price index rise from bottom by 0.6%
SELL – When the index fall from the peak by 0.6%
2. BUY – When the Dow 20 price index rises from the bottom by 1.8%
SELL – When the Dow 20 price index falls from a peak by 1.8%
3. BUY – When the Fed Fund Target rate drops by at least ½ point .
SELL – When the Fed Fund Target rate rise by at least ½ point
4. BUY – When the yield Curve (AAA Corporate Yield Minus 90 days Commercial
Paper Yield ) crosses by 0.6.
SELL – When the yield curve fall below -0.2. Go Neutral in Between -0.2 to 0.6.

5. Zweig Bond Model When Constructed (1966–1986).
• The model was long the
benchmark only 54 percent
of the time. Since this is a
trading model, I have added
the equity drawdown
history in the bottom panel.
• Graph shows Zweig bond
model when constructed
with model indicators and
plots for drawdown and
bond total return
drawdown.

6. Zweig Bond Model Real–Time (1986–2014).
• Still, as can be seen from
the Sharpe ratios the model
has handily beaten a buy–
and–hold strategy, with less
risk. (The Sharpe ratio
measures risk–adjusted
performance; the higher the
number, the better.)
• Graph shows Zweig bond
real-time with model
indicators and plots for
model equity line, bond
total return and corp bond
index.

7. Zweig Bond Model Real–Time (1966 –2014).
•Graph shows Zweig
bond model full-
history with model
indicators and plots
for model equity line,
bond total return and
corp bond index.

8. Modified Zweig Bond Model
• Two things jump out:
• (1) the losses show that the trend component doesn't get you out of the
market when the Fed is easy and prices are falling, and
• (2) you couldn't really trade the Dow 20 when it existed, let alone now, when it
doesn't.
• To minimize potential losses, I added a simple trend indicator: a 50–day (10–
week) moving average of the Dow 20's price with a cross of 1 percent
• If the Dow 20's price crosses below its 50–day average by at least 1 percent,
this indicator goes negative.
• Crossing above the 50–day by at least 1 percent sends the indicator positive.
• With this addition the model is now a five–indicator model, and as with the
original model, the sum of all the indicators needs to be a –1 or a +1 to get a
signal.

9. Modified Model for Bonds
1. BUY – When the Dow 20 price index rise from bottom by 0.6% /
SELL – When the index fall from the peak by 0.6%
2. BUY – When the Dow 20 price index rises from the bottom by 1.8%
/ SELL – When the Dow 20 price index falls from a peak by 1.8%
3. BUY – When the Dow 20 price index crosses above its 50 days(10
weeks) moving average by 1% . / SELL – when the index crosses below
the 50 days by 1%
4. BUY – When the Fed Fund Target rate drops by at least ½ point ./
SELL – When the Fed Fund Target rate rise by at least ½ point
5. BUY – When the yield Curve (AAA Corporate Yield Minus 90 days
Commercial Paper Yield ) crosses by 0.6. / SELL – When the yield curve
fall below -0.2. Go Neutral in Between -0.2 to 0.6.

10. Modified Zweig Bond Model (1966–1986).
•Graph shows
modified Zweig bond
model with model
indicators and plots
for series, GPA%,
Sharpe ratio, new
highs, Max DD%, and
dollar amount.

11. Modified Zweig Bond Model (1986 – 2014).
• Graph shows
modified Zweig
bond model full
history with model
indicators and plots
for series, GPA%,
Sharpe ratio, new
highs, Max DD%,
and dollar amount.

12. Modified Zweig Bond Model (1966 - 2014).
• Graph shows modified
Zweig bond model with
model indicators and plots
for model equity line, bond
total return and corp bond
index.
• Graph shows modified
Zweig bond model with
model indicators and plots
for series, GPA%, Sharpe
ratio, new highs, Max DD%,
and dollar amount.

13. Modified Zweig Bond Model with FBNDX.
• The results using the modified
Zweig Bond Model signals can be
seen in the chart.
• At the outset they don't appear
impressive. But remember that
we have been dealing with a
very strong bond market during
the time frame covered (1986–
2014).
• What is significant is that the
model does work, as reflected by
the higher Sharpe ratio, lower
drawdowns, and increased time
spent long.
• Graph shows modified Zweig
bond model - FBNDX with model
indicators and plots for fidelity
investment grade bond total
return gain per annum.

14. Modified Zweig Bond Model with JNK.
• The same model shown in
calculated on the price of the
SPDR Barclays High Yield Bond
ETF (JNK) instead, with the
results based on its total
return.
• As for trade frequency, the
trades averaged about 0.7 per
year.
• Graph shows modified Zweig
bond model - JNK with model
indicators and plots for SPDR
Barclays High Yield bond total
return gain per annum.