P MBonds and stocks compete for their piece of the investment pie.  Yields on long term bonds have spiked from 3% to 4.5% in the last several months, an event that cries out for some counting.

I looked at the last 30 years or so of market history.  Using a definition of yield change as:

chg = r(t) / r(t-1) - 1

the study looked at monthly data for US 30 year Treasury yields and the subsequent monthly net change in the S&P.  For the 39 times when the monthly change in bonds exceeded 5% the market in the following month performed as follows:

P M Study

The first column of numbers shows the stock performance one month later, the second is for two months ahead. The one-month results might seem anomalous, in the sense that the market is usually up, some 64% of the time, but down on average. The 64% figure is actually not that high given that the market was up some 61% of the time for all months in the sample. Looking at the individual events there were three occasions when the market dropped more than 5% the next month.  This is also consistent with the relatively large standard deviation.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008





Speak your mind

3 Comments so far

  1. david higgs on June 8, 2009 12:02 pm

    wonder if it ever makes a difference as to what month of the year the 30 is 4% — that is, summer or winter months…

  2. Anton Johnson on June 8, 2009 1:09 pm

    The homebuilder sector has a significant negative return expectation 1 and 2 months after US 30 year Treasury monthly yields increase by > 5%.

  3. gwendolyn tibbs on September 9, 2009 5:12 pm

    A coworker of yours was discussing her investments with a broker. Your coworker was confused because she had purchased a 10% bond but the broker kept repeating that it had a 9% yield to maturity. Explain the concept of yield to maturity in a 350-700-word paper.


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