The Treasuries And Corporates Bond Returns Assignment

Research current information (within the last two months) on the yields and maturity for: US Treasuries, Municipal Bonds, and Corporate Bonds. Tasks: Analyze what the pure expectations theory would imply about the yield curve for each security. Evaluate the yields and maturities for each of the securities. Justify which you would hold and why, relative to interest rate risk. The Treasuries And Corporates Bond Returns Assignment

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Bonds Yields and Maturity

From the report provided by Nuveen (2022), the Treasuries and Corporates bond returns were positive while the Municipal bonds yields declined with the outflows standing at -$16 billion and new issue supply at $5.6 B. Hence, the paper will evaluate the Treasury, Corporate and Municipal bonds using the pure-expectancy theory.

Treasury Bonds

Treasuries include the businesses that present low-risk investments due to the support they get from the US federal government. Hence, those investors that purchase the treasuries acknowledge that the investment will have lesser risks than other investments since they led the US government their money (Kotomin, 2021)The Treasuries And Corporates Bond Returns Assignment. The most important aspect to acknowledge when evaluating treasuries is that the government pays back the investors with interest referred to as coupons which means the borrowing cost to the government. For the treasury bondholders to identify the return rates that the government needs to repay, they use the supply and demand curve. Another important factor to note regards the Treasury bond being issued by focusing on face value with the payment being made on the maturity date, and auctioneering takes place to the primary dealers depending on the bids that specify the minimum yields.

Hence, in determining the treasury yields, the consideration is on secondary trading where if the securities price rises, the yields fall while the price paid for bond drops, leading to yield rising. When reflecting on the Pure-Expectations theory, the theory indicates that the future expected interest rates equal the forward rates present for today (Kotomin, 2021). That means the forward rates are unbiased predictors that can help make future spot rate expectations. Hence, if the treasury yields go up, the bond prices will decrease, especially if the federal government increases its funds’ rate target through monetary policies. That means the treasury yields are unpredictable since no one knows the stability of the supply or demand curve. Also, considering that the treasury bonds exist in long and short-term categories, it influences the Treasuries bond maturity pace. Hence, with the current status of Treasury bonds increasing, it shows that the yields cannot easily be reflected in future expectations The Treasuries And Corporates Bond Returns Assignment.

Corporates Bonds

The corporates bond’s current yield depends on coupon payments mainly paid twice every year, accounting for most of the corporate bond’s yields. In most cases, the corporate bond contains the built-in price appreciation that leads the bond to yield to maturity, which adds to the investor’s additional return (Kotomin, 2021)The Treasuries And Corporates Bond Returns Assignment. The most interesting aspect about a corporate bond is that it is possible to purchase it at a discount, and then the investor holds it to maturity to attain its par value. However, the corporate bond also may provide a zero-coupon bond though the yield to maturity depends solely on the built-in price appreciation function. When using the pure-expectation theory, investors more concerned with predictable annual income engage with corporate bonds, which in most cases exceed the government yields. That is because the corporate bonds’ annual coupons are easily predictable and project a high increase compared to the common stock dividends. The best thing with corporate bonds is the ability to assess future credit rating risks, especially through capitalization and interest-coverage ratios. That explains why corporate bonds have yielded higher interest in the US market in June.

Municipal Bonds

Municipal bond yields keep fluctuating, thus presenting those investors who invest in these bonds with higher volatility (Kotomin, 2021). However, investors who engage in fixed income should be aware that once the price drops, the yields need to increase. For instance, on June 27^th 2022, the municipal bonds yields decreased, which was impacted by a new issue registered at $5.6B with -$1.6B (Nuveen, 2022)The Treasuries And Corporates Bond Returns Assignment. Such decline has been common with municipal bonds since the yields have reflected a positive increase only a few times. Hence, before investing in municipal bonds, the investors need to evaluate their particular investments and the federal and state income tax brackets since different States have different taxable-equivalent yields indexes. Furthermore, due to the common cases of municipal bonds decline, the pure-expectancy theory comes into play since the investors already acknowledge that municipal bonds rarely produce positive returns.

The Bond I Resonate With Among the Three Bonds

Of the three bonds, I would select the corporate bonds since it presents various options to the investor and the assurance factor of positive yields. However, investors should always be focused on investing where the interest increases and is predictable. That is because a bond like the treasury bond has registered a positive value together with the corporate bonds but presents uncertainties. Hence, such a situation may limit an investor from achieving maximum investment goals since they are not sure when the market fluctuation may occur, leading to an investor losing a huge sum of money The Treasuries And Corporates Bond Returns Assignment.

Conclusion

The paper has evaluated the treasury, corporate and municipal bonds and their yields. Corporate bonds are essential to investors since they project positive yields. Hence, despite the treasury bond projecting a positive yield, its unpredictability becomes the issue. Hence, through the pure-expectancy theory, municipal bonds can easily be predicted on their negative yields while corporate bonds consistently project positive yields The Treasuries And Corporates Bond Returns Assignment.

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References

Kotomin, V. (2021). The clientele effect around the turn of the year: evidence from the bond markets. Journal of Economics and Finance, 45(4), 637-653. https://doi.org/10.1007/s12197-021-09550-y

Nuveen (June 27th, 2022). Weekly fixed income update highlights. https://www.nuveen.com/global/insights/investment-outlook/fixed-income-weekly-commentary The Treasuries And Corporates Bond Returns Assignment