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Historic Return and Risk December 1959 to December 2002. Does a longer time period reveal a different return-risk relationship? Historically, there has been no pay-off from duration extension Intermediate Treasuries have had returns similar to long Treasuries

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Historic return and risk december 1959 to december 2002 l.jpg
Historic Return and RiskDecember 1959 to December 2002

  • Does a longer time period reveal a different return-risk relationship?

  • Historically, there has been no pay-off from duration extension

    • Intermediate Treasuries have had returns similar to long Treasuries

  • There has also been no pay-off to investing in credit

    • Long corporates have had returns similar to intermediate and long Treasuries

No credit pay-off

…….

S&P 500

Intermediate

Treasury

Long

Corporate

Long

Treasury

………………………

No duration pay-off

One Month

Treasury Bill

Source: Ibbotson Associates


Fixed income investment choices december 1988 to december 2002 l.jpg
Fixed Income Investment ChoicesDecember 1988 to December 2002

  • For some investors cash is the “safe” asset

  • A look at historical return and risk suggests two fixed income conclusions

    • Investment grade bond returns have been essentially the same, and

    • Fixed income investors have only had one choice to make

      • How much return volatility to take

Lehman

Aggregate

Lehman Credit

Lehman

MBS

Lehman

Government

Treasury Bill

Note: Lehman duration data begin Dec. 1988.


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Is Yield the Best Predictor of Future Return?Average Credit Ratings And YieldDecember 1988 to December 2002

  • Many investors believe that, in the long-run, higher yield should translate into higher return

  • Typically, higher yield is associated with higher credit risk

  • Credit losses, though, may diminish a yield advantage

  • Have higher yields translated into higher return?

Credit

C

Credit

B

MBS

Credit

BB

Credit

AAA

Credit

BBB

Credit

A

Credit

AA

US

Government

Source: Merrill Indices, Bloomberg

AA

A

BBB

BB

B

C

AAA


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Is Yield the Best Predictor of Future Return?Average Credit Ratings And YieldDecember 1988 to December 2002

  • Historically, investors have had a hard time forecasting credit losses

  • As a result, higher yield has not been a source of higher return

    • Rather it has been a source of opportunity cost

Credit

AAA

Credit

AA

Credit

A

MBS

Credit

BBB

Credit

BB

US

Government

Credit

B

Credit

C

Source: Merrill Indices, Bloomberg

AA

A

BBB

BB

B

C

AAA


Historical pay off to sector diversification december 1988 to december 2002 l.jpg
Historical Pay-Off to Sector DiversificationDecember 1988 to December 2002

  • For many investors, the government sector is the “safe” fixed income sector

  • Historically, the credit sector has had the same return as 5-7 years Government bonds

  • Historically, the mortgage sector has had:

    • Return volatility similar to three year governments, and

    • Outperformed comparable duration governments by about 50 basis points per annum

US Government 10+ Years

US

Credit

LehmanAggregate

US Government 7-10 Years

US Government 5-7 Years

Lehman US MBS

US Government

US High Yield

US Government 3-5 Years

US Government 1-3 Years

Three Month Treasury Bill


Historic return and risk december 1925 to march 2003 l.jpg
Historic Return And RiskDecember 1925 to March 2003

  • lkjlkjljlj

S&P 500

No credit pay-off

…….

Long

Corporate

Intermediate

Treasury

Long

Treasury

………………………

No duration pay-off

One Month

Treasury Bill

Inflation


Historic return and risk december 1959 to march 2003 l.jpg
Historic Return And RiskDecember 1959 to March 2003

  • Does a longer time periodreveal a different return-risk relationship?

  • Historically, there has been no pay-off from duration extension

    • Intermediate Treasuries have had returns similar to long Treasuries

  • There has also been no pay-off to investing in credit

    • Long corporates have had returns similar to intermediate and long Treasuries

No credit pay-off

…….

S&P 500

Intermediate

Treasury

Long

Corporate

Long

Treasury

One Month

Treasury Bill

………………………

No duration pay-off

Inflation

Source: Ibbotson Associates


Historical return and risk december 1925 to march 2003 l.jpg
Historical Return And RiskDecember 1925 to March 2003

Long

Corporate

S&P 500

One Month

Treasury Bill

Long

Treasury

Intermediate

Treasury

Note: Data source Ibbotson Associates. Methodology: create two vectors of real returns conditional on the contemporaneous real return of the S&P 500.

One vector represents asset returns when the stock market real return is above average, the other represents returns when equity real returns are below average.


Historical return and risk december 1925 to march 20039 l.jpg
Historical Return And RiskDecember 1925 to March 2003

Intermediate

Treasury

Long

Corporate

Long

Treasury

One Month

Treasury Bill

Note: Data source Ibbotson Associates. Methodology: create two vectors of real returns conditional on the contemporaneous real return of the S&P 500.

One vector represents asset returns when the stock market real return is above average, the other represents returns when equity real returns are below average.


Historical return and risk december 1925 to march 200310 l.jpg
Historical Return And RiskDecember 1925 to March 2003

One Month

Treasury Bill

Long

Corporate

Long

Treasury

S&P 500

Intermediate

Treasury

Note: Data source Ibbotson Associates. Methodology: create two vectors of real returns conditional on the contemporaneous real return of the S&P 500.

One vector represents asset returns when the stock market real return is above average, the other represents returns when equity real returns are below average.


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Historical Treasury Returns When Treasury Index Rates Rise Or FallContemporaneous, December 1988 to April 2003


Slide12 l.jpg
Historical Treasury Returns After Treasury Index Rates Rise Or FallOne Month Lag, December 1988 to April 2003


Historical returns after treasury index rates rise one month lag december 1988 to april 2003 l.jpg
Historical Returns After Treasury Index Rates Rise Or FallOne Month Lag, December 1988 to April 2003


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Historical Returns After Treasury Index Rates Rise Or FallOne Month Lag, December 1988 to April 2003 Return In Excess Of T-Bill


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Historical Returns NBER Expansion/Recession Or FallContemporaneous, December 1988 to April 2003Return In Excess Of T-Bill


Historical yields december 1988 to april 2003 l.jpg
Historical Yields Or FallDecember 1988 to April 2003


Slide17 l.jpg
Historical Returns Positive Yield Curve Or FallOne Month Lag, December 1988 to April 2003Return In Excess Of T-Bill


Slide18 l.jpg
Historical Returns Yield Curve Above In Sample Average Or FallOne Month Lag, December 1988 to April 2003Return In Excess Of T-Bill


Slide19 l.jpg
Historical Returns Yield Curve Above Trailing Twelve Month AverageOne Month Lag, December 1988 to April 2003Return In Excess Of T-Bill


Slide20 l.jpg
Historical Returns Five Year CMT Rates Rise AverageOne Month Lag, December 1988 to April 2003Return In Excess Of T-Bill


Slide21 l.jpg
Historical Returns Three Month CMT Rates Rise AverageOne Month Lag, December 1988 to April 2003Return In Excess Of T-Bill


Slide22 l.jpg
Historical Returns Three Month CMT Above One Year Average AverageOne Month Lag, December 1988 to April 2003Return In Excess Of T-Bill


Slide23 l.jpg
Historical Returns S&P 500 Returns Positive AverageOne Month Lag, December 1988 to April 2003Return In Excess Of T-Bill


Slide24 l.jpg
Historical Returns S&P 500 PE Above One Year Average AverageOne Month Lag, December 1988 to April 2003Return In Excess Of T-Bill


Slide25 l.jpg
Historical Returns BAA-AAA Spread Above One Year Average AverageOne Month Lag, December 1988 to April 2003Return In Excess Of T-Bill


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Historical Returns BAA-AAA Increase AverageOne Month Lag, December 1988 to April 2003Return In Excess Of T-Bill


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Historical Returns Growth Outperforms Value AverageOne Month Lag, December 1988 to April 2003Return In Excess Of T-Bill



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  • Claude, AverageI would like to concentrate on the graphs on pages 1, 2, 4, and 5.Basically, we will cut the data into two buckets, A and B and graph the curves for these (on the same graph, i.e. there willbe two curves, sample A and sample B).1. A=NBER recessions (Peak to Trough), B=NBER expansions (Trough to Peak) http://www.nber.orgAll of the next graphs are predicitve. We observe a state and then take a position the next month.2. Term structure inversions (5yr-3mo Treasury yield). A=Inversion (sample the month *after* inversion, i.e. if term structure inverts in Feb, March goes into A, if it returns to positive slope in September, A will include March-September, October will go to B. This way, we are operating on an ex ante basis.3. Past changes in interest rate yields. A=month after US 5-yr increases, B=month after US 5yr decreases.4. Same except use 90 day T-bill yield5. The 90-day T-bill minus the 12month moving average of the Tbill yield. Positive is A, negative is B.6. Last month's S&P 500 return, negative is A, positive is B.7. S&P 500 P/E minus 12-month average P/E negative is A, positive is B.8. Change in Moody's Baa-Aaa (on Federal reserve of St. Louis Website), negative is A, positive is B9. Baa-Aaa minus 12-month moving average. Positive is A, negative is B.10??? Value minus growth performance??? in previous month?Add whatever your favorite indicator is.-Cam


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Historical Treasury Returns After Treasury Index Rates Rise Or FallOne Month Lag, December 1988 to April 2003


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