Why are Treasury returns highly correlated with Corporate Bonds returns?

[Matt_Likes_Analysis]

@S2000magician

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.

you’re right on this but lesser so because of anything to do with maturty and more so because bills don’t pay a coupon but bonds and notes do so bonds and notes cannot become bills by nature. i’m not sure of the definition being such that the name is given by maturity date at issuance. in practice, if a bond comes within a note’s time to maturity, it becomes a note in practice for all intents and purposes. maybe its a canadian thing. i don’t know.

[Mobius_Strip]

I disagree with the general practice of using the term ‘fixed income’ to reference a security which pays a variable coupon rate.

[igor555]

fixed payment interval income

or is it

fixed interval income

[MrSmart]

@S2000magician

@MrSmart

S2K, I disagree with you.

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.

I may disagree with you in the sense that a bond is an even more general term than you propose, bond used in non-financial terms. A bond, however, in those contexts are financial obligations. A bill, note, and “bond” refer to subjective tiered maturities of monetary assets, overlapping but not substitutes. This is not specifically directed at you, but to any misunderstanding.

[bchad]

Well, I didn’t read the posts above so it’s probably been covered, but just in case.

When you look at how corporate bonds are priced (at least investment grade stuff), they take a similar maturity treasury rate and add a spread (though CFA will teach you a few ways to add the spread, the spread over the YTM is the easiest one to describe).

When you look at the size of the spread, it’s typically a fraction of a percent, whereas the typical Treasury YTM is at least a percent or two, and often more like 4%. So when the bond price changes, it’s likely that the Treasury rate is changing, and the corporate bond is changing along with it. (i.e. if Treasuries were 3% and corps were 3.2%, then if Treasuries go up to 3.5%, corps are going to go up to about 3.7%).

The truth is that there’s not much that corporate bonds can do *not* to be correlated to changes in treasury yields. Individual companies can blow up, yes, but usually the whole corporate sector won’t. (2008 is an exception). Even if - in my example - corporates became super super super safe, it would only go from about 3.2% to 3.0%… and that’s not all that much.