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US Treasury Bond Betas: 1961–2019

J. Benson Durham
The Journal of Fixed Income Spring 2020, 29 (4) 20-47; DOI: https://doi.org/10.3905/jfi.2020.1.083
J. Benson Durham
is a former managing director and global head of data analytics for Fundamental Fixed Income at BlackRock in New York, NY
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Abstract

This study plumbs the limits of US Treasuries (USTs) as a “safe asset” through lenses neglected in the literature on the correlation between bond and equity returns. An asymmetric M-GARCH model confirms a shift from positive to negative correlations in recent decades. However, the variance around bond-stock covariance has increased, consistent with greater not lower covariance premiums. Spectral analysis shows that, like the contribution to overall variance in returns, high-frequency cycles of no longer than a week account for most of the covariance between the yardstick risk-free and risky assets, increasingly so over the years. However, there is no consistent evidence that USTs are better hedges against shorter-lived shocks. Quantile regressions suggest that USTs are not particularly convex hedges, either. Even amid very low yields in recent years, the distribution of 10-year UST returns is wider as well as more negatively skewed conditioned on stock market swoons.

TOPICS: Wealth management, equity portfolio management, fixed income and structured finance, performance measurement

Key Findings

  • • An asymmetric M-GARCH model confirms a shift from positive to negative correlations between returns on US Treasuries (USTs) and the S&P 500 in recent decades. However, the variance around bond-stock covariance has increased, consistent with greater not lower covariance premiums.

  • • Spectral analysis shows that, like the contribution to overall variance in returns, high-frequency cycles of no longer than a week account for most of the covariance between the yardstick risk-free and risky assets, increasingly so over the years. However, there is no consistent evidence that USTs are better hedges against shorter-lived shocks.

  • • Quantile regressions suggest that USTs are not particularly convex hedges, either. Even amid very low yields in recent years, the distribution of 10-year UST returns is wider, as well as more negatively skewed, conditioned on stock market swoons.

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The Journal of Fixed Income: 29 (4)
The Journal of Fixed Income
Vol. 29, Issue 4
Spring 2020
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US Treasury Bond Betas: 1961–2019
J. Benson Durham
The Journal of Fixed Income Mar 2020, 29 (4) 20-47; DOI: 10.3905/jfi.2020.1.083

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US Treasury Bond Betas: 1961–2019
J. Benson Durham
The Journal of Fixed Income Mar 2020, 29 (4) 20-47; DOI: 10.3905/jfi.2020.1.083
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  • Article
    • Abstract
    • LITERATURE REVIEW AND MOTIVATION
    • AN ASYMMETRIC MULTIVARIATE-GARCH LENS
    • SPECTRAL ANALYSIS
    • CONVEXITY AND QUANTILE REGRESSIONS
    • DISCUSSION
    • ADDITIONAL READING
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