Forecasting Bond Returns and Evaluating Bond Funds

Can we predict the performance of bond funds? This question needs to be separated into two questions: Can we predict the bond market? Can we predict the alpha, or return above (or below) the bond market’s return, of bond managers?

The bond market is a poor bet going forward. Some managers, however, will earn returns above and below the market return, and it’s valuable to know whether one can select winning managers in the fixed-income asset class.

While past performance is not a guarantee of future alpha, it sure is a hint – the skills needed to generate alpha in a given market are likely to be as valuable in one period as in another. This...