Hi,
Can anyone possible explain why Treasury returns are highly correlated with Corporate bonds returns (historically above 90%)? Since bond prices go down when rates go up, shouldn’t that result in a negative correlation?
http://www.assetcorrelation.com/bonds/1826
Any help/guidance would be greatly appreciated!
Thanks!
There’s a negative correlation between returns and prices, of course, but returns are returns: when Treasury returns increase, corporate bond returns increase (i.e., the spread doesn’t necessarily change) and when Treasure returns decrease, corporate bond returns decrease.
Positive correlation.
Seems pretty straightforward.
Treasuries are still priced like bonds with a coupon and a target yield. Corporate bonds are priced over treasury yields (add additional yield to treasury yield) to include what is called a credit spread. So when the yields on treasuries change (and thus their price), the yields on corporate bonds also change (and thus their price too).
Investment grade corporate bonds exhibit high correlation in relation to treasuries as investment grade credit spreads are relatively stable and large price shifts are more reflective of shifts in the yield curve rather than changes in the credit rating/spread of the company. They also have a low rates of default.
However when you move down the credit ratings to high yield and junk, changes in credit spreads is more volatile and default rates are much higher, so much more of the yield changes are a result of company-specific reasons, rather than shifts in the treasury yield curve. As such, these will exhibit far less correlation with treasuries than your standard investment grade corporate bonds.
Well . . . duh!
They _ are _ bonds.
Lol yep, but its easy to see that is where they are conceptually lacking, and the terminology can be confusing when you are learning it for the first time.
Please don’t ask this question with CFA behind your name =P
A few years ago I got into an argument with a dimwit who thought that _ T-bills _ and _ T-notes _ weren’t bonds, because their names were . . . well . . . bills and notes.
Moron.
well technically they aren’t bonds. they’re not all bonds but they are all fixed income. the bill, notes and bond titles just designate their term to maturity.
Technically . . . they _ are _ bonds.
Look at the US Treasury website: they write that they sell three types of bonds : T-bills, T-notes, and T-bonds.
Having worked at PIMCO for six years and analyzed bonds that whole time, I’m pretty sure I know a bond when I see one. The name (bill, note) doesn’t matter: they’re bonds.
Does Bill know another Bill when he sees one?
Thats what i’d like to know.
… hence the confusion lol.
this sentence doesn’t make sense. there are three types of pizza. hamburger, hot dog and pizza. hmm.
edit: it’s like calling all stars ‘suns’ when in fact only stars with planets within their system should be called suns. if all stars were suns, the need for the word sun would not exist.
one of the subtypes cannot have the same name as the group name or else it is redundant. if all three were in fact bonds, there would be no need to differentiate them by name. bonds become notes which then become bills due to their time to maturity. unless you believe for some reason that bonds shouldn’t be segmented by their time to maturity.
Maturity
The issuer has to repay the nominal amount on the maturity date. As long as all due payments have been made, the issuer has no further obligations to the bond holders after the maturity date. The length of time until the maturity date is often referred to as the term or tenor or maturity of a bond. The maturity can be any length of time, although debt securities with a term of less than one year are generally designated money market instruments rather than bonds. Most bonds have a term of up to 30 years. Some bonds have been issued with terms of 50 years or more, and historically there have been some issues with no maturity date (irredeemables). In the market for United States Treasury securities, there are three categories of bond maturities:
Yes, but the reverse is true - all suns are stars, which is what you have here. All treasury bills and notes (suns) are bonds (stars).
Hamburgers and hot dogs are not pizzas.
T-bills are bonds. T-notes are bonds.
It’s not like that at all.
Stars without planets aren’t suns.
T-bills are bonds. T-notes are bonds.
So it’s redundant. Big deal.
I didn’t realize that you established the rules for naming elements of a set. I’d have alerted Paul Erdős if I’d known; alas, now it’s too late.
You betray your ignorance with this sentence. Bonds do not become notes, and notes do not become bills. The names T-bond, T-note, and T-bill refer to the original maturity on the security, not the remaining time to maturity. A 30-year T-bond with 6 months left to maturity is still a T-bond.
I’m sorry that you find it so difficult to embrace the fact that a T-bill is a bond and that a T-note is a bond. Nevertheless, they’re bonds. That fact doesn’t require your acceptance.
yes, but not all bonds (stars) are bills/notes (suns). to say bonds consist of bills, notes and bonds is just lazy language creation. come on webster’s.
^ i obviously understand that basically anything with a fixed coupon and a maturity date is a bond. i still think its lazy. fixed income securities is a more proper name is the definition from most of what i see on the interwebs. using the word bond implies > 10 years.
Let it go Matt, you lost.
S2K, I disagree with you. Matt, I disagree with you too.
A bond is an obligation, with or without income, irrespetive of maturity. The terms bills, notes, and bonds are all subjective measures of liquidity. A dollar bill is most liquid, a treasury bill is most liquid, they are both bonds with monetary value. The economic opportunity of credit is what is misleading. Is a dollar bill worth the same as a treasury dollar bill with the same face value?
I don’t see anything in your paragraph that disagrees with anything I wrote.
my argument is against using the word “bond” when you actually mean fixed income. bond means something very specific but we have gotten used to using the word bond for all of fixed income. we use the word bond in the same way it was used in the 16th century, when there really only was one time of fixed income. it’s annoying as someone who understands the difference, and it’s lazy for CFA folk to use the word to mean fixed income. most people would agree that debentures and maybe even preferred shares are included in what many people call “bonds” when in fact they are accurately positioned in a group called fixed income.