Jun

7

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


Comments

Name

Email

Website

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.

Archives

Resources & Links

Search