Abstract

This paper uses the principle component analysis to investigate the impact of term structure movements on the investment performance of bond mutual funds. More specifically, based on the panel data, we decompose term structure movements into three principal factors (i.e., level parameter,β0 ; slope parameter,β1 ; and curvature parameter,β2), and to illustrate the effects of the movements of term structure on the bond fund returns. The empirical results indicate that the level and curvature factors have significantly positive and negative effects on the investment performance of bond mutual funds, respectively. In addition, the effects of term structure movements on the real bond fund returns are less sensitive than those of the quasi money market fund. Finally, this paper simulates an active trading strategy based on the embedded information of the term structure movements. And we conclude that, for both quasi money market fund and real bond fund, it can help to obtain better investment performance if the term structure movements are effectively predicted.