(February 4, 2013) – Yields on United States Treasury bills have dropped overall since the financial crisis of 2008, but canny investors can optimize their allocations to this safe haven by choosing duration wisely.
Five- and seven-year government bonds deliver the optimal risk-adjusted returns, finance professor Charles Corcoran found during his study of yields over the last forty months. The least attractive risk/return tradeoff is on the 30-year treasury, just as it was pre-2008, he asserts.
“Interest rates on treasury bonds of all maturities have dropped significantly in the past seven years,” Corcoran writes in his paper, “Yield Curve Investing: Optimizing Risk-Adjusted Returns,” which was recently published in the Global Journal of Business Research. “With the new, lower interest rate environment, the relative risk versus return tradeoff, as measured by risk-adjusted return, has likewise changed.
Compared with one-year securities, which were the pre-2008 risk/return sweet spot, he found that the five- and seven-year terms now offer a tradeoff: “The steeper yield curve provides incremental returns exceeding the increased duration risk with these maturities. The 30-year bond, while offering the greatest nominal yield for all months when traded, is also subject relatively high interest rate risk, rendering the 30-year a poor value on a risk-adjusted basis.”
Investors have continued to sink assets into US treasuries despite the low-interest rates, which Corcoran characterizes as a “whisker above zero,” in part due to tightness in the corporate bond market and volatility in global markets overall.
Read the entire paper here.